Wednesday, September 28, 2005

Delphi: GM, UAW deal soon -- or else

Auto supplier hires bankruptcy attorney in case it can't negotiate cuts in wages, benefits.

By Bill Vlasic / The Detroit News

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Delphi Corp. needs assurances of a bailout on labor costs from General Motors Corp. and the United Auto Workers before mid-October to avoid bankruptcy, Delphi CEO Robert S. "Steve" Miller said Tuesday.

Miller

He also reiterated that Delphi can no longer afford to pay 4,000 union employees who are not working because of production declines.

In an interview with The Detroit News, Miller said he will recommend a Chapter 11 bankruptcy filing to his board unless he can secure an agreement with the union and GM to substantially cut Delphi's labor and benefit costs before Oct. 17. That's the last day U.S. companies can file before tougher new bankruptcy laws take effect.

"What has to be done by that date in order that I recommend to my board that we not file?" he said. "That there is a reasonable assurance that there is a transaction in hand."

While negotiations are continuing, Miller is laying the groundwork for a possible Chapter 11 filing by hiring ace bankruptcy lawyer Jack Butler, best known as lead attorney for Kmart Corp. when it went bankrupt in 2002.

Butler, a corporate restructuring expert with the law firm Skadden, Arps, Slate, Meagher & Flom, was retained by Delphi to analyze legal options available to the struggling auto parts maker.

"Butler has been advising me on my strategic alternatives," Miller said. "There are two paths we can take. One is not to file, and one is to file. When you are in the red zone, you need to know all the ins and outs of Chapter 11."

And time, Miller said, is running short on getting a deal with the UAW and GM.

"It is a judgment I make every morning," he said. "Is there enough time left to get to that point? We haven't filed yet because I still think there's a decent opportunity."

A bankruptcy filing by Delphi could be a major blow to Michigan's struggling economy as well as Detroit's Big Three, smaller suppliers and the UAW.

Miller, who joined Delphi in July, has repeatedly said the ailing parts manufacturer needs relief from health care costs and UAW wage levels in its U.S. operations to become profitable and compete with foreign companies.

GM and union officials have declined to comment on the ongoing talks with Delphi. Miller called the negotiations "continuing and constructive," but declined to provide details.

While many auto analysts still expect a three-way deal to rescue Delphi, some experts are now hedging their bets.

"Up until recently, we believed that ... GM, the UAW and Delphi would come to a resolution that would avert a bankruptcy filing by Delphi," Deutsche Bank analyst Rod Lache said this week. "However, we are increasingly recognizing that there is an equal likelihood of a Delphi Chapter 11 filing."

Delphi shares slid another 8 percent, or 24 cents, to close at $2.75 in New York Stock Exchange trading Tuesday.

Miller, for his part, said Troy-based Delphi, which has 185,000 workers worldwide, cannot continue operating under the cost structure it inherited when GM spun it off as a stand-alone corporation in 1999.

He has proposed that GM buy out or take back union workers, and assume pension and other benefits obligations. Delphi also needs concessions from the UAW on plant closings and work rules, he said. Delphi wants to eliminate a so-called jobs bank that provides income to laid-off workers. Some 4,000 Delphi workers -- about 12 percent of its 36,000 U.S. hourly employees -- are in the jobs bank.

"Can we keep losing $400 million a year paying workers in the jobs bank, and $400 million a quarter on operations?" Miller said. "No, we cannot deal with that indefinitely. And we can't wait until 2007."

The 2007 date refers to the expiration of the union's national agreement with Delphi and GM, Ford Motor Co. and the Chrysler Group.

Under the current contract, GM has some obligations for health care and pensions for thousands of former GM hourly workers now employed by Delphi.

Analysts estimate that GM may be liable for as much as $6 billion in pensions and other obligations. Miller, however, said he cannot specify what is required of GM under the current contract.

"The short answer is no," he said. "It's a contract between the UAW and GM, and it's not at all clear in the way it was drafted."

A Chapter 11 filing by Delphi would be unprecedented in the auto industry. With more than $28 billion in annual revenues, it is the largest U.S. auto parts supplier. Nearly half of its business is with GM.

While Chapter 11 would put Delphi under the supervision of the U.S. Bankruptcy Court, GM appears unconcerned that such a move would imperil the automaker's upcoming launches of key new products like the Chevrolet Tahoe SUV.

"My understanding is that companies in Chapter 11 continue to operate and make products," GM Vice Chairman Bob Lutz said at a media briefing on the new Tahoe last week.

Miller said Delphi has enough cash to run its operations and meet its contractual obligations in the immediate future.

"We have adequate liquidity to run our operations now," he said. "Whether or not we file Chapter 11, we will have adequate liquidity to ship parts on time with quality and at contract prices."

He also dispelled rumors that Delphi would be unable to pay its own suppliers on the first business day of next month.

"I have no concerns about paying our vendors on the third of October," he said.

With federal bankruptcy rules changing radically Oct. 18, Miller says Delphi needs firm commitments from the UAW and GM to prevent a filing before then.

"We are getting to a very sensitive point here," he said. "It's a very important date. It's an important consideration because of the change in the laws."

The addition of Butler to his strategic team is a critical part of Miller's Chapter 11 strategy.

Butler, who was unavailable for comment, is credited with shepherding Kmart through Chapter 11. He helped recruit a new management team for the Troy-based retailer and was instrumental in Kmart's acquisition by billionaire investor Edward Lampert.

"I certainly hope I don't file for Chapter 11," Miller said. "Hiring Jack doesn't mean you're going to file. It means you have to study that alternative very closely."

You can reach Bill Vlasic at (313) 222-2152 or bvlasic@detnews.com.