President Obama Set To Discuss Chrysler; Bankruptcy Path to Fiat Deal
April 30, 2009
By Michelle Krebs
DETROIT -- Chrysler will live to see another day as part of the growing empire of Italy's Fiat, but a Chapter 11 bankruptcy filing is the path that Chrysler and Fiat will take to get there.
President Obama will hold a briefing on Chrysler at noon Thursday. Word is that he will announce Chrysler will file bankruptcy, likely in New York. The hope is for a quick in and out of bankruptcy, with Chrysler emerging as a more viable company with only the good assets under Fiat ownership.
On Wednesday night, negotiations with Chrysler's lenders over reducing the automaker's debt collapsed. At the same time, members of the United Auto Workers (UAW) union overwhelmingly approved a concessionary contract.
Beyond dealing with debtholders, bankruptcy likely is seen as a quick and cheaper way to halve Chrysler's dealer ranks of 3,200.
Obama Announcement
President Obama is scheduled for a White House press conference at noon to announce the plan to put Chrysler into bankruptcy but also merge with Fiat.
On Wednesday, President Obama said he was hopeful a Chrysler-Fiat alliance would be completed.
Debtholders Hold Out
On Wednesday, the U.S. Treasury increased its offer to lenders, being asked to reduce their payback on Chrysler debt, by $250 million to $2.25 billion on Chrysler's $6.9 billion in debt. Some debtholders already had agreed to $2 billion, however, others, including 45 banks and hedge funds, turned down the sweetened offer.
UAW Approves Accord
Also on Wednesday night, members of the United Auto Workers union overwhelmingly ratified a new concessionary labor contract that freezes wages for Chrysler's 26,000 U.S. hourly workers and reduces Chrysler's contribution to the retiree health-care fund due next year by more than $5 billion. In return, that so-called VEBA fund would own 55 percent of Chrysler.
Slashing Dealer Ranks
Throughout negotiations with Fiat, little has been said about Chrysler's desperate need to reduce its dealer ranks. In contrast, General Motors has frequently mentioned its goal to cut dealerships and, in fact, already is talking with dealers about reductions.
It appears Chrysler will use bankruptcy to cut dealers and has the government's support to do so, apparently. President Obama's automotive task force reportedly wants Chrysler to reduce its dealer ranks by more than half to put it more in line with its market share -- and the number of Toyota dealers.
As of the end of the first quarter this year, Chrysler had about 3,200 dealers and 11 percent market share. By comparison, Toyota had just under 1,500 dealers and 16 percent market share. Fewer dealers generate more sales-per-dealer and profits for each dealer. An automaker then can reduce its costs in terms of dealer-support infrastructure, financing and incentive pay. Fewer dealers also allow an automaker to better control its inventories.
Buying out unwanted dealerships requires immense amounts of cash that Chrysler does not have and undoubtedly will attract lawsuits by dealers who claim they are not being treated fairly. Bankruptcy law trumps state franchise laws. Through bankruptcy, a judge can dissolve the franchise agreement and allow the new, Fiat-owned Chrysler to select the dealers it wants to keep.
Nevertheless, Chrysler will be socked with lawsuits as the National Automobile Dealers Association, the industry trade group representing dealers, is providing legal help to Chrysler, Jeep and Dodge dealers.
Quick Bankruptcy?
President Obama and officials of his administration have repeatedly said any bankruptcy filing by Chrysler and/or GM would be a "quick rinse" one or a "surgical" one under the bankruptcy code, allowing an automaker to emerge in as little as a month.
Bankruptcy experts doubt any auto company bankruptcy will be that quick and seemingly easy with so many constituencies involved who have a right to their say in court.
Posted by Michelle Krebs at 5:28 AM under Chrysler , Companies , Featured | Comments (0) | digg this | Seed Newsvine
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