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(Updates throughout, including comments from GM and Navistar representatives, information on the original deal, context and latest share prices.)
By John D. Stoll
Of THE WALL STREET JOURNAL
DETROIT -(Dow Jones)- General Motors Corp.'s (GM) non-binding agreement to sell its medium-duty truck business to Navistar International Corp. (NAV) has unraveled, dealing a fresh blow to GM's effort to raise capital and streamline sprawling North American operations.
Navistar spokesman Roy Wiley said Wednesday the move comes as the companies face challenges completing the deal amid tough economic conditions and a stinging downturn in the truck market due to high gasoline prices. Wiley said the two parties will continue to discuss a deal, but for now GM will continue operating and owning its medium-duty truck business, which is based in Flint, Mich .
"We'll look at other options for the business," GM spokeswoman Renee Rashid- Merem said. "For businesses like this one, there's still a certain segment of customers that are going to need the product and there are still companies that are in it. It's just a matter of finding a solution that works. It's time intensive."
(This report and related background material will be available on The Wall Street Journal's Web site, WSJ.com.)
The breakdown is the latest in a series of deals in the auto industry that have come unglued due to a tough environment. Ford Motor Co. (F) and Chrysler LLC have seen recent sales of plants or business lines fall through or fail to gain traction due to a lack of financing and a lack of confidence in the health of the U.S. auto market. Sales of automobiles are currently tracking near a 15- year nadir, with truck sales carrying the brunt of the pain due to $4 -per-gallon gasoline costs.
Ford and Johnson Controls Inc. (JCI) terminated a memorandum of understanding for the sale of a former Visteon Corp. (VC) plant. Ford, which took the plant back from its struggling supplier in 2005, said market conditions contributed to the termination of the sale. In June, Ford's automotive components division terminated its memorandum of understanding to sell an Ohio plant to Meridian Automotive Systems Inc., again because of slumping industry sales.
GM's non-binding pact with Navistar was announced in December. GM's medium- duty sales fell 20% through July compared with the first seven months of 2007. Under the agreement, 30,000 to 40,000 medium-duty trucks would have been produced by Navistar , and sold under GM's Chevrolet and GMC brand names.
For Navistar , the decision may slow the company's efforts to tap into new revenue sources amid a slowdown in commercial truck sales. As a truck builder and engine supplier, the Warrenville, Ill., company relies on the robustness of the truck business to keep profits on track.
Navistar builds medium-duty trucks in Springfield, Ohio . The United Auto Workers had been concerned that engine and truck maker would shutter the Flint operation, moving hundreds of jobs to a non-GM facility.
Navistar shares were down 0.7% at $55.86 in late-afternoon trading, while GM shares were up 1.5% at $10.10 .
In Need Of Cash, Weighing Asset Sales
GM's struggle to unload the medium-duty business comes as the auto maker is trying to also sell its Hummer SUV unit. Hummer sales have wilted in 2008, and GM is looking to shed the unit in order to raise capital, simplify its complex brand structure, and escape the gas-guzzling image that Hummer portrays.
In July, GM said it had $2 billion to $4 billion in global assets it could consider selling in order to raise additional liquidity. Rashed-Merem, the GM spokeswoman, said the medium-duty truck business was not incorporated in that estimate.
GM is shopping certain assets as part of a plan to accumulate $15 billion in liquidity by the end of 2009. It currently has $26 billion in cash and credit lines available, but the steep North American downturn threatens to drain the company's war chest significantly in coming months.
GM has been running through about $1 billion in cash per month due to restructuring expenses and operating losses.
While GM is the No.1 light-truck maker in the U.S., it would like to exit the medium-duty truck market because the business is extremely capital-intensive and relatively low margin compared to light-duty truck sales. Its medium-duty assembly line in Flint turns out vehicles like tow trucks and buses. Navistar is the leading producer of such vehicles, and was eager to acquire the GM business in order to expand its leadership in the segment.
The medium-duty sale was expected to result in less than $1 billion in proceeds for GM. It would have come after a series of asset sales conducted by the auto maker in recent years, including the sale of controlling stake in GMAC LLC and the sale of its Allison transmission unit. Those deals were done with private-equity firms.
It is unclear what the price range on Hummer is, partially because GM is open to a variety of options when it comes to selling the unit, people close to the matter said. GM also needs to negotiate separation terms with Hummer dealers, many of which recently invested millions of dollars in revamping Hummer stores, and that could be a challenge given the power that dealers have in negotiating with auto maker.
"We're still looking at opportunities," Rashed-Merem said in relation to Hummer.
In a recent interview with on the Charlie Rose Show that aired Monday on PBS, GM Chief Executive Rick Wagoner said the company has received interest in Hummer.
"We have had plenty of interest so far," Wagoner said. "We've kind of been doing the stuff you need to do to potentially sell an asset."
( Lauren Pollock and Jeff Bennett of Dow Jones Newswires contributed to this report)
- By John D. Stoll , The Wall Street Journal; 248- 204-5533;