GM Reaches Agreement With UAW

General Motors Corp. reached a tentative pact Monday with the United Auto Workers union to reduce its healthcare costs by about $3 billion annually as the automaker unveiled plans to sell control of its profitable financing arm to raise cash.

The moves came as GM posted a third-quarter loss of $1.6 billion. The company is under siege from popular models by Asian automakers, its own high operating expenses and declining sales as consumers shift away from gas-guzzling sport utility vehicles. The loss was GM’s third consecutive quarterly deficit and was much worse than Wall Street expected.

“Our financial performance continues to be quite disappointing,” GM Chief Executive Rick Wagoner said in a speech to employees. He said the company needed to speed up its restructuring to regain profitability.

The main culprit for the maker of Chevrolet, Buick, Saturn, Hummer, Pontiac and other brands was its North American auto business, which has lost more than $4 billion this year despite robust summer sales from its employee-discount pricing plan.

GM is losing more than $1,000 per vehicle in North America largely because it’s saddled with healthcare and pension costs for about 1.1 million salaried and hourly U.S. workers, retirees, their dependents and surviving spouses, analysts said.

But GM hopes to narrow that loss with the UAW agreement, which would save the company about $3 billion a year in healthcare expenses. It was the biggest cost reduction announced in a single day by GM, Wagoner said.

“This is a critical juncture in our company’s history,” he said.

GM also plans to sell a majority interest in its financing business, General Motors Acceptance Corp., although it declined to speculate on potential buyers.

The moves drew generally favorable reviews from analysts and investors, many of whom had expected that all or part of GMAC might be divested as the automaker tried to shore up its finances.

“This really raises GM’s opportunity to improve,” said David Cole, director of the Center for Automotive Research in Ann Arbor, Mich. The healthcare pact, and the “cooperative spirit” of the automaker and the union, “is a very important change for GM.”

GM’s stock rose 7.5% after the announcements, gaining $2.11 to close at $30.09. But the stock still has fallen 25% this year.

Ford Motor Co. said it also was talking to the union about ways to cut healthcare costs, and analysts said they expected DaimlerChrysler’s Chrysler division to follow suit.

UAW President Ron Gettelfinger said that the union’s leadership agreed to cut healthcare benefits after “an in-depth analysis of GM’s financial situation,” and that the plan was “clearly in the best interests” of the automaker’s hourly workers and retirees.

GM and the union declined to provide more details about the agreement, pending a ratification vote by the UAW’s members. GM couldn’t predict how long that process might take.

For months, Wagoner has said that cutting GM’s healthcare expenses is crucial to the company’s future as it tries to compete with foreign automakers that don’t have the same burden.

The agreement with the UAW would also slash GM’s long-term healthcare liabilities for retirees by about $15 billion, or 25%, from its current level of more than $60 billion.

Detroit-based GM has been under pressure to act quickly.

The world’s largest automaker is grappling not only with red ink but also a decades-long slide in market share to Japanese automakers. GM has also seen its credit ratings fall to “junk” status, and despite shuttering some plants it still suffers from excess manufacturing capacity and burdensome healthcare and pension costs.

Wagoner reiterated Monday that the automaker still needed to close additional plants and cut about 25,000 more jobs over the next three years. Most of GM’s facilities are east of the Rockies.

The company also is bracing for potential fallout from this month’s bankruptcy filing by Delphi Corp., the nation’s largest auto-parts maker and a former GM subsidiary.

Delphi remains a key supplier to GM, and the automaker has said it could be responsible for billions of dollars of Delphi’s healthcare and pension liabilities. Goldman Sachs & Co. analyst Robert Barry said in a report that savings from GM’s deal with the UAW could be offset by its Delphi obligations.

In addition, GM and Wagoner face pressure from Los Angeles billionaire Kirk Kerkorian, whose investment firm, Tracinda Corp., last week raised its stake in the automaker to nearly 10%.

Tracinda has indicated it may seek a seat on GM’s board, and there has been speculation that Kerkorian may push for changes at the automaker. Wagoner told reporters Monday that “we don’t have anything to say regarding Mr. Kerkorian.” Kerkorian also declined to comment.

Another major challenge for GM is to stop its market share decline.

But with the employee-pricing plan gone, new-auto sales in the first nine days of October tumbled 33% industrywide from the same period a year ago, J.D. Power & Associates said Friday. And GM suffered the biggest drop -- 57%.

GM still faces “a lot of headwinds out there,” said David Healy, an analyst at Burnham Securities Inc., who owns GMAC bonds. Sales of GM’s largest SUVs so far this year are down 30% to 40% from the same period last year, he said.

GM said it mainly plans to sell control of GMAC -- which provides mortgages, insurance and financing for GM auto sales -- to improve the financing unit’s credit rating.

By divesting itself of control, GM hopes GMAC’s credit rating will rise back to investment grade, thus lowering what the division must pay to obtain funds and further boosting its earnings. Analysts have estimated GMAC’s total market value at $20 billion or more.

Selling control of GMAC is “a mixed blessing,” at least in the short run, Healy said. Although GM would raise substantial cash, it would lose the full benefit of GMAC’s profitability.

In the third quarter, GMAC’s profit rose 9% to $675 million -- a record for the period -- from $620 million a year earlier despite losses related to Hurricane Katrina, GM said.

GM’s third-quarter loss of $1.6 billion, or $2.89 a share, contrasts with net income of $315 million, or 56 cents, a year earlier. Revenue in the latest quarter climbed 5% to $47.2 billion from $44.9 billion.

Excluding one-time gains and charges, GM lost $1.1 billion in the latest quarter, or $1.92 a share. Wall Street expected a loss of 87 cents a share, according to analysts surveyed by Thomson Financial.

Bloomberg News was used in compiling this report.