GM, Chrysler in merger talks: source

By Kevin Krolicki and Jui Chakravorty Das

DETROIT/NEW YORK (Reuters) - General Motors has had talks with smaller rival Chrysler LLC about a merger that would combine the No. 1 and No. 3 American automakers at a time when both are struggling to cut costs and shore up cash, according to a source briefed on the matter.

Separately, Ford Motor Co, plans to sell shares from its $1.4-billion stake in Japan's Mazda Motor Co, a second source said.

Barron's reported that GM was preparing to approach the U.S. Federal Reserve about borrowing money from the central bank's discount window because of the logjam in credit markets that has shut it out of other borrowing.

The moves come as all three Detroit-based automakers are struggling with a plunge in U.S. sales to 15-year lows and facing tough questions from investors and creditors about whether they have the cash to ride out a deepening downturn.

Analysts said urgent steps by all three U.S. automakers to shore up cash could be expected as the global financial crisis begins to dampen auto sales in what had been fast-growing markets in Europe, Asia and South America.

But they also questioned whether an outright merger with Chrysler could serve GM's interests.

"On the surface, it frankly doesn't make sense," said Aaron Bragman, an analyst with Global Insight. "The acquisition of Chrysler wouldn't solve and problems GM has and would only make some existing ones worse."

Representatives of Cerberus Capital Management, the private equity firm that owns an 80.1-percent stake in Chrysler, were not immediately available for comment.

Chrysler declined comment. GM declined to comment on whether it had any talks with Chrysler but said talks with other automakers were a routine part of business.

"GM officials routinely discuss issues of mutual interest with other automakers," said GM spokeswoman Renee Rashid-Merem. "As a policy, we do not confirm or comment publicly on those private discussions, which in many cases, do not lead anywhere."

Cerberus is also in exploratory talks with other parties, including Renault-Nissan, to sell Chrysler, the source said.

But any deal would hinge on the completion of the sale of Daimler AG's remaining 19.9-percent stake in Chrysler to Cerberus, the source said. Cerberus last month said it had approached Daimler to buy that remaining stake.

Chrysler's private owners and GM have had "very early" and "very exploratory" talks about a merger, the source said.

The talks between GM and Cerberus, first reported by the New York Times and the Wall Street Journal, began more than a month ago and are not certain to produce a deal.

The Journal said that Cerberus had proposed a swap of assets with GM that would give the private equity firm full ownership of finance company GMAC.

In exchange, GM would get the loss-making auto operations of Chrysler, the newspaper said.

Cerberus currently owns 51 percent of GMAC, GM's former captive finance company which has been hobbled by its exposure to the U.S. mortgage market. GM owns the remainder of GMAC.

Global Insight's Bragman said a deal structured in that way would benefit Cerberus since the private equity firm would end up with GMAC just as a $700 billion U.S. government bailout fund to buy up distressed debt begins operations.

"They would get rid of an auto company that has weighed on their results and they would get full control of GMAC just as the government is about to come to the rescue," Bragman said.

LONG PROCESS

The reported talks between the two sides would revive discussions between Chrysler and GM about a potential merger in early 2007 when Germany's Daimler AG began the process of selling off Chrysler that culminated in a deal later that year to sell the automaker to Cerberus.

GM Chief Executive Rick Wagoner also said last year that he saw some potential for Cerberus to combine GMAC with Chrysler Financial, the finance company affiliated with the No. 3 automaker.

Analysts have questioned Chrysler's ability to survive as a stand-alone automaker, given its reliance on sales to North America for some 90 percent of its revenue.

But a combination with GM would match two companies with overlapping weaknesses, analysts said.

For one thing, both GM and Chrysler have been hurt by their reliance on sales of trucks and SUVs. For another, both have been struggling to cut union-represented production jobs in reaction to weaker U.S. sales.

"It would be taking two cash-burning companies and putting them together so they burn cash faster," said Erich Merkle, an auto industry consultant with Crowe Horwath.

Chrysler, which no longer discloses results as a private company, has also had discussions about a tie-up with India's Tata Motors and Italy's Fiat in recent months.

GM shares fell to near a 60-year low this week on fears the global financial crisis could derail its turnaround plans.

GM and Ford both ruled out on Friday seeking bankruptcy protection.

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European Union Bans Incandescent Light Bulbs

Written by Timothy B. Hurst
EU energy ministers meeting last week in Luxembourg have given final approval to an EU-wide ban on incandescent light bulbs that would begin in 2010. The switch to energy-saving bulbs, first ordered at last year’s Brussels summit as part of an aggressive energy policy to fight climate change, was approved at the negotiations leading up to a meeting of European heads of state, being held next week.

>>More on European energy policy at RG&B

Traditional incandescent cost around 1/3 as much as standard compact fluorescent lightbulbs (CFLs). But the CFLs last longer and use less energy while illuminated. Incandescent filament light bulbs use up to five times as much energy as standard CFLs.

Advocates claim that replacing the worst-performing lamps with today’s best available technology will reduce domestic energy consumption for lighting by 60 percent; equivalent to preventing 30 million tons of CO2 pollution every year. The move would help EU member states meet their proposed emissions reductions of 20% by 2020, targets that may currently be in question because of the lingering economic crisis.

Not everyone is enthusiastic about switch the CFL technology. Opponents to the measure argue that the fluorescent bulbs take a long time to warm up and sometimes have a tendency to flicker. The bulbs are also too big for some (very) old-fashioned fittings and are generally more expensive - although the EU has vowed costs will come down before 2010. CFLs also carry the added baggage of potential health risks and environmental problems because of the mercury found in each bulb.

However, all of the arguments used against compact fluorescents cannot be levied against LED technology. Light emitting diodes, are said to be brighter, safer, and longer lasting than even the best CFL technology. However, until the cost of LEDs comes down, a large-scale switchover to that technology remains several years away. But with directives like this latest one from the EU, it is quite likely that the price of LEDs will come down as businesses ramp-up development and production.

The new light bulb scheme will initially apply to bulbs of 75 watts and higher and the phasing out of the traditional bulbs will come into effect beginning March 1, 2009.

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Is Cheaper Oil A Good Thing?

By Vivienne Walt / Paris

How far can it fall? People have been anxiously wondering as they watch the plunging stock market. But increasingly the same question is being asked about another crucial figure: the price of oil. It has plummeted nearly 40% in just three months, from about $147 a barrel in July to below $83 on Friday, with no obvious bottom in sight. If that sounds good, you are probably a driver who winces these days at filling your gas tank. But the downward spiral could mean trouble for oil-rich countries and for the environment.

Oil analysts admit that most of them failed to predict how fast oil prices would drop. Just a few months ago, some were saying oil might reach $200 a barrel by year's end. "The analysts have been quite surprised by the pace and volatility of the decline," says David Fyfe, senior oil analyst for the International Energy Agency in Paris, which as a rule does not predict oil prices. "The volatility has been quite marked."

This year's sky-high oil prices are partly responsible for the drop. Since oil hit $100 a barrel for the first time early this year, Americans (who consume one-quarter of the world's energy) began cutting back. When gas began selling above $4 a gallon, American consumers made "a psychological shift into the sense of crisis and a sense of permanence," says Greg Priddy, oil analyst for the Eurasia Group in Washington. Instead of believing that gas prices would finally fall again, many began changing their daily habits — they started driving the smaller car in a two-car garage or consolidating shopping trips. That has meant a huge slump in Americans' gas use. Even before the market meltdown, Americans consumed 800,000 barrels of oil a day less during the first half of this year than the same period last year. As demand fell, so did prices, and as prices have fallen, investors have begun pulling money out of the oil market, fearing a collapse, says Leila Benali, an expert on Middle East oil for the Cambridge Energy Research Associates in Paris, adding: "People are getting nervous about demand next year. There is talk of a global recession."

For oil-rich countries the slump has come at a bad time. As the oil price began rising during the past few years, governments and big oil companies plowed billions into exploring and developing new fields in Russia, Angola, Mexico, Brazil and Saudi Arabia — projects whose costs have more than doubled in the past few years, in part because soaring steel prices drove up drilling equipment costs and oil-rig rentals. Just as global demand has begun to slow, millions more barrels of oil a day from new fields have hit the world market.

The big oil producers have good reason to be nervous. Many are still haunted by a disastrous error made at an Opec meeting in Jakarta in 1999, when the cartel — which produces more than a third of the world's oil — opted to raise its production levels. Within weeks Asian stock markets tumbled, driving world oil prices down to $11 a barrel. Oil officials in Saudi Arabia and elsewhere have cited that price crash as the reason they've rebuffed pleas from President Bush to pump more oil. Says Benali: "Countries have learned the lessons of the past."

Though oil-producers and environmentalists rarely agree about anything, both groups have done extremely well from sky-high oil prices during the past year. The high price at U.S. gas pumps has pushed both Barack Obama and John McCain into making the development of alternative fuels and electric cars key elements of their campaign platforms. But if gas prices continue to drop, those initiatives might begin to seem unnecessarily costly to many Americans. (Time's Bryan Walsh reported this week that some countries are already reviewing environmental initiatives as gas prices fall.) "If gas prices drop under $3 a gallon, it will be interesting to see whether it saps the political will," says Priddy. "Americans like their sprawl and generally don't like to give those things up."

If oil producers have their way, oil prices could start rising again. Their growing anxiety erupted early this week, when Iranian and Venezuelan officials warned that if Opec waited much longer before cutting its output, it could face another massive price collapse. On Thursday, Opec officials scheduled an emergency meeting in Vienna for Nov. 18 rather than wait until the cartel's scheduled summit in Algiers in early December. In the meantime, the world's biggest oil producer, Saudi Arabia — which increased production in the summer — has already begun loading less oil on its tankers, according to global oil figures.

For some countries there is a fear far greater than an economic recession: political turmoil. Iran, which earns 80% of its revenues from oil exports, set this year's budget on the assumption that oil would trade at $90 a barrel — a figure which seemed conservatively low until recently, but which is now above the world price. "If the price stays there a while Iran would cut spending," Priddy says. That might include cutting heavy gas subsidies for Iranian drivers, who have rioted in the past when the government tried to ration gas or raise the price at the pump. Hugo Chavez could face similar problems in Venezuela if oil prices drop below $75 a barrel — the rate at which the country calculated this year's budget. The problems lower prices could cause in those countries could be more visceral than those posed so far by the current financial upheaval.

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