Chrysler and Union Agree to Deal Ahead of Deadline

By DAVID N. GOODMAN
|  Monday, Apr 27, 2009  |  Updated 10:15 PM CDT
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Chrysler and Union Agree to Deal Ahead of Deadline

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Chrysler is living on $4 billion in U.S. government loans and must win concessions from its unions, swap equity for debt and ink a partnership deal with Fiat to stay a stand-alone company.

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STERLING HEIGHTS, Michigan  — The United Auto Workers union will own 55 percent of a restructured Chrysler LLC and its retiree health care trust will get a seat on the board of directors if union members vote to approve contract concessions later this week.

Factory-level union leaders voted unanimously Monday night to recommend approval of concessions that union President Ron Gettelfinger said would help keep the automaker out of bankruptcy.

A summary of the revised Chrysler-UAW contract says that Italian automaker Fiat Group SpA eventually will own 35 percent of a restructured Chrysler, with the remaining 10 percent stake divided between the U.S. government and secured lenders, mostly banks and hedge funds.

The summary says that Chrysler stock eventually will be traded publicly again, as there are mechanisms for the UAW to sell shares to fund the trust.

The Obama administration required that equity fund at least 50 percent of Chrysler's $10.6 billion obligation to a union-run trust that will take over retiree health care costs starting next year, according to the summary.

It also said that under the agreement, workers will no longer get most of their pay if they are laid off. Instead, they will get supplemental pay from the company equal to 50 percent of their gross base pay.

Union leaders say ratification votes across the U.S. should be finished by Wednesday. That's one day before Chrysler's government-imposed deadline to restructure or the government will end all aid to the struggling company.

Chrysler is living on $4 billion in U.S. government loans and must win concessions from its unions, swap equity for debt and ink a partnership deal with Fiat.

Without the deals, Chrysler almost certainly will be auctioned off in pieces.

Fiat has been in discussions with Chrysler to take a 20 percent stake in the Auburn Hills, Michigan, automaker in exchange for Fiat's small-car technology.

Under the deal, which was reached with Chrysler, Fiat and the U.S. Treasury Department, cost-of-living pay raises will be suspended through the contract's expiration in 2011, and it adds a provision for binding arbitration on a new contract through 2015. If no agreement can be reached on a new contract, the arbitrator must base total hourly labor costs on a rate comparable to Chrysler's U.S. competitors, including foreign-owned manufacturers.

The union also agreed to consolidate nonskilled labor job classifications into a team concept at all factories. Performance and Christmas bonuses will be suspended this year and next to help pay health care costs.

As part of the deal, Fiat committed to manufacturing a small car in one of Chrysler's U.S. facilities, but the summary does not say where. In addition, Fiat will share key technology with Chrysler, including all of its vehicle underpinnings.

The health care trust will select one member of Chrysler's board, with the consent of the UAW.

"We fought to maintain our wages, our health care and our jobs," Gettelfinger and UAW Vice President General Holiefield said in a letter to workers. "In the face of adversity, we secured new product guarantees, and we negotiated new opportunities for UAW involvement in future business decisions."

In addition to the stock, the company will pay its remaining $4.6 billion obligation to the health care trust in cash annually through 2023. Payments of $300 million will be made next year and in 2011, rising to $400 million in 2012, and $600 million in 2013. After that, the sum jumps to $650 million per year in 2014 through 2017, and to $823 million in 2019 through 2023.

Under the health care trust, retirees will no longer have dental and vision coverage, according to the summary sheet. The union says it likely will have to make additional benefit cuts in 2010 and 2011 because of uncertainty over the value of the Chrysler stock.

However, if the stock gains in value, benefits could be restored, the summary sheet says.

The local leaders recommended approval of the deal after a three-hour meeting at a suburban Detroit hotel.

The deal likely will serve as the template for a pact with General Motors Corp., which also is receiving federal aid and faces a restructuring deadline. Ford Motor Co. already has signed a deal with the UAW, but has said it will seek parity if Chrysler and GM get better terms.

Chrysler also has won deep concessions from the Canadian Auto Workers union as it races to meet the government deadline. If it can pull the package together in time, the government has said it will loan a new Chrysler-Fiat partnership up to $6 billion more. Chrysler also could get $500 million to stay afloat through April.

Also Monday, Germany's Daimler AG said it has reached a deal to get rid of its remaining 19.9 percent stake in Chrysler, severing the last tie between the two automakers that was formed more than a decade ago.

The agreement is expected to stanch the billions in losses Daimler has sustained as a result of its stake in the struggling U.S. automaker.

"Following the transfer of the term sheet into the final definitive agreements, the relationship between Daimler and Chrysler will solely consist of supplier-customer relations, including limited support for certain dealer financing until the end of September 2009, as well as certain guaranties," Daimler said in its statement.

Under the agreement, Daimler will forgive $1.9 billion in loans it extended to Auburn Hills, Michigan-based Chrysler, which it had already written off in its 2008 financial results.

Daimler also agreed to pay $200 million into Chrysler's pension plan when the deal takes effect and in each of the two years afterward. The money will help fund the pensions of former DaimlerChrysler AG workers, Daimler said.

The existing pension guaranty of $1 billion in relation to the Pension Benefit Guaranty Corp., the government corporation that insures the pensions of millions of workers and retirees, will be reduced to $200 million and remain in place through August 2012.

Daimler said the deal is expected to reduce its second-quarter earnings before interest and tax by about $700 million. The automaker has recorded billions in losses related to Chrysler since selling off most of its stake in the U.S. carmaker to New York-based private equity firm Cerberus Capital Management LP in 2007.

For the fourth quarter of 2008 alone, Daimler said its Chrysler stake pulled its results lower by some 2 billion euros. The German company reported a 1.53 billion euro loss for the quarter. Daimler is scheduled to release its first-quarter earnings on Tuesday.

Cerberus' acquisition of 80.1 percent of Chrysler in 2007 dissolved a stormy "merger of equals" made in 1998 between Daimler-Benz and Chrysler Corp. But in November 2008, Cerberus accused Daimler of intentionally misleading it before it sold the controlling stake to the private equity firm the year before in a $7.4 billion deal.

As part of Monday's deal, Chrysler and Cerberus agreed to waive any claims, including that one, stemming from the 2007 sale, Daimler said.
 

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