GM, Union Reach Tentative Health Care Deal; Posts $1.6B Loss for Q3

NEW YORK – General Motors Corp. (GM) on Monday announced a deal with the United Auto Workers (search) union to slash its multibillion-dollar health-care costs, sending its shares up as much as 13 percent even as it posted a fourth straight quarterly loss.

The cash-strapped automaker said the pact would reduce its employee health-care expenses by $3 billion annually before taxes.

"This is a huge move," said GM Chairman and Chief Executive Rick Wagoner (search), who has been under pressure to stop the financial bleeding at the world's biggest automaker and pull its crucial North American operations back to profitability.

He called the UAW deal on health care, which analysts said could be replicated at Ford Motor Co. (F) and the Chrysler arm of Germany's DaimlerChrysler (DCX), "the single biggest cost reduction" in GM history.

GM also said it was exploring the sale of a controlling interest in its profitable finance arm, aimed at restoring General Motors Acceptance Corp.'s investment-grade rating and renewing access to low-cost financing.

"Plans to sell a controlling GMAC stake would likely boost credit ratings and cut funding costs," said Goldman Sachs analyst Robert Barry. But he also said such a sale would "divert earnings from GM."

GMAC posted record third-quarter earnings of $675 million on strong results from its mortgage operations.

Pressure on GM is intense, with its main auto parts supplier in bankruptcy, imports cutting into its market share, sales of sport utility vehicles stalled, and raw material costs rising.

Highlighting what it described as GM's "very poor" third-quarter results, the Standard & Poor's rating agency warned that it may cut the company's debt rating further into high-yield, or "junk," territory.

Months of talks with the UAW over GM's demand for cuts in health-care and other benefits — costs identified by Wagoner as the company's single biggest challenge — have finally produced results. But analyst Himanshu Patel of JP Morgan cautioned that savings from the deal, while at the high end of market expectations, may be partly offset by GM's need to absorb pension and health-care liabilities at bankrupt parts maker Delphi Corp (search).

GM, Delphi's former parent, said on Monday that it could be on the hook for up to $12 billion in liabilities at Delphi, up from a previous estimate of $11 billion.

The tentative UAW agreement, which must be ratified by GM's unionized workers, is projected to reduce GM's retiree health-care liabilities by about $15 billion and result in a 25 percent cut in the company's hourly health-care liability, GM said.

Wagoner has said reining in GM's health-care costs, expected to total nearly $6 billion this year, is the biggest part of his turnaround strategy for the automaker.

GM shares were up $2.02 at $30 on the New York Stock Exchange after rising as high as $31.50 earlier in the session. Prices of GM debt also rose.

GM, which lost more than $1.4 billion in the first half of the year, posted a third-quarter loss of $1.6 billion, or $2.89 a share.

Excluding special items — including a charge of $805 million for asset impairments primarily in North America and Europe and restructuring charges at GM Europe of $56 million — the third-quarter loss was $1.92 per share, much worse than the average loss forecast of 81 cents a share among analysts polled by Reuters Estimates.

In North America, where the company faces its biggest challenges, GM has lost more than $4.5 billion so far this year. It cited lower production volumes, health-care and raw material costs, and declining SUV sales as driving forces behind the losses.

GM said it aims to cut materials costs by a net $1 billion next year as part of broad-based efforts to turn around its operations.

GM also plans to cut structural costs by $5 billion by the end of 2006, with additional cost-reduction initiatives, including salary freezes for salaried employees and executives.

Increasing the pressure on GM is corporate financier Kirk Kerkorian, who may demand a seat on the company's board. The billionaire Las Vegas casino mogul increased his stake in GM to 9.9 percent last week.

Wagoner declined to comment on whether Kerkorian would join the board.

As of last Friday, GM shares were down about 30 percent for the year to date, compared with a 2 percent drop in the S&P 500 index and a 4.6 percent decline in the blue-chip Dow Jones industrial average.