Delphi reaches deal with GM

Firm's reorganization plan sets stage for it to emerge from bankruptcy.

David Shepardson / Detroit News Washington Bureau

WASHINGTON -- Delphi Corp. said Thursday it reached a wide-ranging agreement with former parent General Motors Corp. and filed a final reorganization plan, clearing a major hurdle toward emerging from bankruptcy.

The agreement resolves all outstanding issues between Delphi and GM and sets the stage for Delphi to emerge from Chapter 11 bankruptcy by the end of the year. It also closes a painful chapter for the Troy-based auto parts giant that included predictions of cataclysmic confrontations with labor that could have shut down Delphi and GM, its largest customer.

"Since the first time Delphi was spun off in 1999, we have completely renovated the commercial relationship between" Delphi and GM, Delphi Chairman Robert S. Miller said in an interview Thursday. "And that is huge. It was a real pleasant surprise that we got through these two years without a significant disruption to our business."

Delphi's October 2005 bankruptcy rocked the U.S. auto industry, prompting several major suppliers to seek court protection from creditors so they could slash labor and other costs to become more competitive. Delphi has cut 24,000 workers from its U.S. labor force in the past two years through buyouts and early retirements funded, in part, by GM.

Under the deal with GM, Delphi will pay the automaker $2.7 billion to settle some claims, while GM will guarantee some business for Delphi and pay a portion of its pension and labor costs. The automaker has said covering pensions and other labor-related expenses would cost about $7 billion.

The settlement ends an often-bitter dispute between GM and Delphi over claims in the billions of dollars. At one point, Delphi had threatened to cancel 300 contracts with GM for key parts.

The settlement "represents another significant step toward Delphi's emergence from bankruptcy," said GM spokesman Randy Arickx.

Despite the agreement, some difficult legal issues remain.

The conduct of Delphi and GM has been the subject of a lengthy investigation by the Securities and Exchange Commission, as well as the Justice Department. Last October, the SEC charged Delphi and nine former executives in an accounting fraud scheme. Delphi and some former executives settled the allegations, but former Delphi Chairman J.T. Battenberg still faces charges.

Still, the settlement announced Thursday is a milestone in Delphi's torturous path out of U.S. Bankruptcy Court.

Under the deal, Delphi will pay GM $1.5 billion within 10 days of approval. In exchange, GM will assume $1.5 billion of Delphi's hourly pension costs.

GM will reimburse Delphi for labor costs exceeding $26 an hour and continue to help pay for employee buyouts. In addition, GM will contribute $450 million into a United Auto Workers-administered health care fund, and will reimburse Delphi for other labor costs through 2015.

Delphi also finalized an organization plan put in place in July after a group of investors led by Appaloosa Management LP agreed to pump up to $2.6 billion into the company. Under the plan, current Delphi shareholders will be able to buy 28 percent of the reorganized company.

Delphi has several more steps to take to emerge from bankruptcy, including raising up to $7.5 billion in debt financing.

John Sheehan, the company's chief restructuring officer, acknowledged that the credit markets had been unsettled in the last three months, but said the company is confident investors will take part in the debt financing.

The reorganization plan must be approved by the court, as well as Delphi's creditors and debt holders.

Other issues still must be resolved. Next month, Delphi is expected to unveil details of its executive compensation program, which could reward executives with payouts totaling more than $400 million.

The huge payout will be tough to accept for Delphi's hourly workers, who have taken large pay cuts. The company has also downsized its U.S. operations, and expects to keep eight of 33 U.S. plants and sell or close the rest.

The company will have just one plant in Michigan -- in Grand Rapids -- and close six others.

The U.S. cutbacks were made possible when more than 24,000 union workers agreed to leave Delphi through a program of buyouts and early retirements costing an estimated $6 billion.

The company is also slashing as many as 8,500 white-collar jobs, trimming another $450 million in annual costs and freezing its hourly and salaried pension plans, which will be replaced with "contemporary" plans.

To satisfy disgruntled investors, Delphi has agreed to pay its $228 million share of a settlement of two class-action lawsuits by shareholders and employees. A federal judge in Detroit tentatively approved the deal worth as much as $342.1 million Wednesday.

After emerging from bankruptcy, Delphi is expected to be profitable, CEO Rodney O'Neal said Thursday.

Delphi is steadily increasing its non-GM business -- to 59 percent of revenue in the first six months of 2007, versus 56 percent in the same period in 2006.

It now has $750 million or more in business from the five other largest automakers. By next year, GM business will account for 32 percent of Delphi's business and will drop to a quarter by 2010 under the deal with GM.

You can reach David Shepardson at (202) 662-8735 or dshepardson@detnews.com.