Delphi CEO Sees Major Downsizing in Bankruptcy

[mgescuro]

From the Wall Street Journal Online
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http://online.wsj.com/article/SB1128..._whats_news_us

Company Hasn't Decided On Federal Pension Bailout; GM Faces Financial Risks
By JEFFREY MCCRACKEN and JOHN D. STOLL
Staff Reporters of THE WALL STREET JOURNAL
October 10, 2005; Page A1

DETROIT -- Delphi Corp., the big auto-parts supplier that filed for Chapter 11 bankruptcy protection on Saturday, plans to shut down or sell off a substantial part of its U.S. operations, but is not yet sure if it will ask the federal government to take over its pension obligations, its chief executive said in an interview.

"We have not decided what we will do," with the Delphi pension plan, said Chairman and CEO Robert S. "Steve" Miller. "We want to try and create a company that accommodates our retirees without having [the pension plan] terminated and turned over" to the government's Pension Benefit Guaranty Corp., he said. The company plan is underfunded by as much as $4.3 billion.

The filing in bankruptcy court in New York by Delphi, the largest U.S. auto supplier, is the clearest sign yet that the U.S. auto industry -- and its unionized workers -- are moving toward the sort of slash-and-burn restructuring that was forced on airline and steel workers by major bankruptcies in those industries.

Besides potential disruptions in auto supplies to manufacturers, the filing could force major concessions on Detroit's largest union, the United Auto Workers, while loading additional costs onto already-strapped auto makers. Especially vulnerable is General Motors Corp., the former parent of Delphi, which guaranteed the pensions and benefits of some Delphi hourly workers when it spun the company off in 1999.

Mr. Miller, a 63-year-old turnaround specialist, led Bethlehem Steel Corp. through bankruptcy and handed that company's pension plan to the PBGC. The filing Saturday came after Mr. Miller failed to negotiate a multibillion-dollar bailout plan with GM, Delphi's largest customer, and major wage-and-benefit concessions from the UAW.

In the interview, Mr. Miller said Delphi's troubles will require the company to divest, consolidate or close "a substantial segment" of its 45 manufacturing sites in the U.S. and Canada, which employ 49,000 workers. He said he also plans to renegotiate the contracts and retirement plans of Delphi's 33,000 union workers and 12,000 retirees.

The filing left plenty of questions unanswered. Delphi, of Troy, Mich., did not detail which or how many U.S. plants it hopes to get rid of. The company previously identified 11 U.S. plants that were unprofitable and could be closed or sold.

In addition, Delphi said it would seek in court to terminate health and life-insurance benefits for its retirees in mid-December. But one question to be answered in court is how much of that GM could be forced to pick back up.

Analysts estimated GM's obligation for retiree benefits at somewhere between $1.6 billion and $6.6 billion. The company's tab for pensions for those retirees could run an additional $3 billion to $4.5 billion if Delphi terminates its plan, analysts estimated.

GM said in a statement that Delphi's filing did not automatically trigger any of its pension or benefit guarantees, and that its ultimate exposure could run anywhere from "no material financial impact" to about $11 billion. The company said an amount close to the midpoint of that range is considered more likely than either end of the range, but that it is "not presently able to estimate the amount" it may be obligated to pay.

Mr. Miller said "it is not inevitable" that Delphi's filing will spur others in the beleaguered auto sector. A half-dozen suppliers have preceded his company into Chapter 11 protection.

But if the Big Three auto makers -- GM, Ford Motor Co. and DaimlerChrysler AG's Chrysler Group -- can't win concessions from the UAW on labor costs, then it is a "very realistic" possibility that they too "will have to use the Chapter 11 process," Mr. Miller said.

UAW officials said they were willing to make concessions to keep Delphi out of bankruptcy, but found the company's demands too high, calling for wage cuts under which UAW members "would not be able to afford a vehicle that our products are assembled into."

In a statement, UAW President Ron Gettelfinger called the filing a "bitter pill." He also criticized Delphi for sweetening the severance packages of 21 top executives the day before seeking bankruptcy protection, a move he called a "disgusting spectacle" at a time when the company is seeking "extraordinary sacrifices" from UAW members.

GM said the Delphi filing provided an opportunity for cost cuts. The auto maker said it now pays about a $2 billion price premium on the parts it gets from Delphi. "A restructuring of Delphi through the Chapter 11 process provides GM with an opportunity to reduce or eliminate that purchase-price premium," GM said.

Mr. Miller said GM and other customers could count on Delphi to continue to operate smoothly as the company moves through the bankruptcy process. And GM said it expects the bankruptcy to have no immediate effect on its global operations.

But some analysts said they expect stutters for the auto maker nonetheless. "There is a very significant supply-chain risk to Delphi and then in turn to GM," said Craig Fitzgerald, a partner at Plante & Moran, a Southfield, Mich., financial advisory firm with about 400 supplier clients. "This is a very fragile supply chain and I just don't see how there can't be production shutdowns after this."

He pointed out that many of Delphi's 3,500 suppliers also supply GM, and estimated that any supplier that gets more than 20% of its business from Delphi is at risk of going under -- causing further disruption in parts supply to GM. Auto analyst Glenn Reynolds, of research firm CreditSights, warned that the UAW could decide to strike Delphi plants that supply GM if the union feels Mr. Miller's contract demands are too onerous.

Delphi's need for help is only one of several serious problems facing GM. Its key North American operations are piling up massive losses, its credit rating was cut to "junk" status earlier this year and it faces a possible further downgrade by Standard & Poor's. At the same time, billionaire investor Kirk Kerkorian has bought a 9.9% stake in the auto maker and has indicated he may seek a seat on GM's board.

Delphi's Mr. Miller expressed disappointment he could not negotiate a bailout from GM and the UAW as he had hoped. He said the two are preoccupied by continuing negotiations to reduce GM's health-care tab, this year slated to hit $5.6 billion.

"GM is occupied by their own discussions with the UAW and we ran out of time," said Mr. Miller.

[mgescuro]

If you have a subscription to the WSJ Online or pick up a copy of the Journal at the local newsstand, the entire article really is worth a read.

Delphi has secured $4.5B in 3rd party financing to fund global operations, with plans to exit bankruptcy in 2007.

No doubt that Delphi has a long road ahead, but they need to take it one step at a time if they want to survive.

There is of course the requisite UAW jabs at Delphi for creating packages for the Executive staff. That's par for the course. Delphi needs management in order to pull out of bankruptcy. Sorry Gettelfinger, that's they way the ball bounces.

[DuSpinnst]

Most of this news is a long time comming when they hired Miller you knew this was where it was going to end up. I just hope they get thier act together. Headquarters is litterally down the street from my house (1.5 miles away), and it is important that Delphi succed

[Dizzer]

It is going to be painful, and in the end, successful. Being from NE Ohio, the name Wilbur Ross keeps coming up in regards to Delphi and the parts business. His performance with LTV's corpse is legendary and bodes well for a restructured Delphi. The UAW, of course, is history.

[Motownr]

QUOTE "But if the Big Three auto makers -- GM, Ford Motor Co. and DaimlerChrysler AG's Chrysler Group -- can't win concessions from the UAW on labor costs, then it is a "very realistic" possibility that they too "will have to use the Chapter 11 process," Mr. Miller said."

Isn't THIS the biggest news in the article?

As mentioned in another thread, some of the big names on Wall Street believe that the Big 2 (at least) are headed for the 'car wash' of Chapt. 11 to strip off the toxins of the UAW.

Supposedly, Kerkorian could make out like a bandit if GM NA goes into Chapter 11, while the rest of the global units stay unchanged. The play is that a 'right-sized' GM NA--minus loser brands and the UAW--is worth a pretty penny when you add in the intl. units and the stub stake in a post Chapter 11 DPH.

I predict we see Miller wearing Wagoner's hat in 2-3 years....

[Dizzer]

Originally Posted by Motownr

QUOTE
I predict we see Miller wearing Wagoner's hat in 2-3 years....

Perfectly worded and I couldn't agree more. Miller and Wilbur Ross are going to reshape the the auto supply side first, and then the OEM auto side after that. Their efforts with BIG STEEL shows the future and the future deosn't include draconian labor agreements or legacy costs. ISG/Mittal is a steel behemouth today because they had the balls to take it on.

[Snafu_SS]

its pretty bad when you hear talk of filing for bankruptcy as a sort of "car wash."

i cant believe that the unions and the auto companies cant make out an agreement w/o something like this...would you rather have no job or get payed what others do??

[goblue1999]

Originally Posted by Snafu_SS

its pretty bad when you hear talk of filing for bankruptcy as a sort of "car wash."

i cant believe that the unions and the auto companies cant make out an agreement w/o something like this...would you rather have no job or get payed what others do??

Logical question, for which you get an illogical answer from the Socialist UAW....they will tell you they would rather see an American Icon go down than give up the gains that they have "fought" so hard for.

[01cavalier]

Im glad in a way Delphi is doing this. The UAW didnt want to accept the changes they wanted, bankruptcy is a way to help make the needed changes happen. Maybe Delphi may just be a good investment. If Miller is good at restructuring, keep Lutz in charge of produce and Miller in charge of turning GM around.

[Supernoma]

Originally Posted by 01cavalier

Im glad in a way Delphi is doing this. The UAW didnt want to accept the changes they wanted, bankruptcy is a way to help make the needed changes happen. Maybe Delphi may just be a good investment. If Miller is good at restructuring, keep Lutz in charge of produce and Miller in charge of turning GM around.

With stock prices below $0.65, 100 shares might make for an inexpensive pet project.
What would a typical brokerage fee be for a stock like Delphi?

[Boscovius]

Reminds of of when I read "Atlas Shrugged" by Ayn Rand.

[tgagneguam]

Originally Posted by mgescuro

...There is of course the requisite UAW jabs at Delphi for creating packages for the Executive staff. That's par for the course. Delphi needs management in order to pull out of bankruptcy. Sorry Gettelfinger, that's they way the ball bounces.

After having read "From Good To Great," I'd say I have to disagree. The several American companies that went through said transformation demonstrated that in rough times, Level 5 managers take their lumps with the peons. And when their companies emerged, the average CEO's of these well-run companies actually earned slightly less than their average CEO counterparts. Oh my god, they were actually passionate about their jobs and didn't see it as just another paycheck.

As much as I think the UAW is truly unreasonable in its compensation demands, I don't think giving more cash to the folks at the top at this hour - however miniscule it is in comparison to overall compensation - is appropriate, either. It makes management look really bad, if nothing else.

[tgagneguam]

...Auto analyst Glenn Reynolds, of research firm CreditSights, warned that the UAW could decide to strike Delphi plants that supply GM if the union feels Mr. Miller's contract demands are too onerous.

This has to be the funniest part of the article; you have to laugh at the galactic stupidity. So, the UAW's big plan to save pensions and such is... to strike a bankrupt company.

"We have not decided what we will do," with the Delphi pension plan, said Chairman and CEO Robert S. "Steve" Miller. "We want to try and create a company that accommodates our retirees without having [the pension plan] terminated and turned over" to the government's Pension Benefit Guaranty Corp., he said. The company plan is underfunded by as much as $4.3 billion.

This is the part that sickens me. So, I will be paying higher taxes to fund the lavish retirements of other people while I have to simultaneously save for my retirement (like most Americans)? Let me tell you how beyond not interested I am in this scenario. Not too much sympathy on my part, let me tell yah.

[Raskolnikov]

My prediction:


GM will find a way to purchase the Delco Electronics div. of Delphi (the only profitable div. last year in North America) to maintain close technology ties.

Anyone agree or disagree?

[lilredcrvtt]

Well, more responses typical of this love in for mismanagers of both Delphi and G.M. When will everyone get it? We are all connected in this massive econonical mess! There are not going to be any "winners". Just a lot of losers!! While everyone looks to blame the unions, workers, management, whatever, the asians are laughing and scooping up market share!

This has to STOP!! Lets hope that this mess can be sorted out and not burn too many people. If not, and this spreads to the other members of the North American auto industry....watch out!!!! The repercussions to the whole economy will be unreal. The massive loss of cash to everyone concerned will be so huge that no one will be left unscathed. So point fingers and blame away, but lets hope that some sensible resolve is found for this horrible mess that Delphi is in, the slash and burn that some of you hope for will do just that, slash and burn the folks who worked their lives in Delphi and G.M. factories. It will not be pretty, so be careful for what you wish....