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AUGUST 8, 2005

Bankruptcy Is Delphi's Trump Card
Will the prospect of Chapter 11 for the parts maker force concessions from GM?

At first glance, you'd think Delphi Corp.'s (DPH ) recent hiring of turnaround specialist Robert S. "Steve" Miller Jr. as its chairman would be good news for General Motors Corp. (GM ) After all, GM still buys gear worth $15 billion annually from its troubled former parts unit. But in recent years, Miller was quick to restructure distressed parts maker Federal-Mogul Corp. (FDMLQ ) and Bethlehem Steel Corp. by seeking bankruptcy protection for both. And the last thing GM Chairman and Chief Executive G. Richard Wagoner Jr. needs right now is for his biggest supplier to head into Chapter 11.

Indeed, a bankrupt Delphi would only add to GM's own financial woes. Miller claims that many of Delphi's parts contracts with GM are unprofitable -- and if Delphi were to file for bankruptcy, Miller says he could cancel the money losers. Plus, if Delphi could no longer fund its obligations to its 12,000 union retirees until September, 2007, it could stick GM with up to $9 billion in pension and health-care benefits that are guaranteed under the spin-off agreement, says analyst Brian Johnson of Sanford C. Bernstein & Co. GM says its Delphi-related liabilities aren't that high, and Delphi is obligated to pay GM back. Still, it's clear the auto maker faces huge exposure if Delphi fails. Says Miller: "Wagoner needs to think about how he is going to manage the Delphi situation."

Consider that an open offer to begin negotiations. Miller would likely only take Delphi into bankruptcy if he and Wagoner can't strike a deal. Delphi lost $408 million on $6.9 billion in revenues in the first quarter. Its pension plan is underfunded by $4.3 billion. Since Delphi took out $2.8 billion in loans before Miller arrived, in part to help cover its pension payments, he has time to talk.

The new chairman says Delphi's board has ordered him to steer the company out of trouble without going into Chapter 11. But he is clearly not afraid of taking such a step. After joining Bethlehem Steel in 2001, he said bankruptcy wasn't his only option -- then filed three weeks later. Miller later sold the company to investor Wilbur L. Ross Jr. "He's not a bluffer," says Ross. "I would take him quite seriously, and I would assume GM would as well."

If his past is any indication, Miller is likely to quickly start selling off assets. His career as a crisis manager started in 1979 when nearly bankrupt Chrysler Corp. (DCX ) hired him to help write its government-backed recovery plan. Miller, who later became chief financial officer, sold off jet maker Gulfstream Aerospace Corp. (GD ) and some finance and defense businesses. In 1997, Miller took over at Waste Management Inc. (WMI ), where he had to clean up after an accounting scandal, slash costs, and reduce debt. He sold it the next year to competitor USA Waste. The transaction eliminated $900 million in overhead for both companies.

At Delphi, look for Miller first to speed up the unloading of poorly performing units; already a dozen plants are marked for sale, closure, or restructuring. Several make low-margin goods such as suspension components and air filters, and more than 80% of the products from those factories go to GM. "Some of these businesses are commodities and are better off being run by someone else," says Miller. Instead, he wants to focus Delphi's resources on high-margin areas, so he will likely keep operations such as consumer and auto-electronics products, as well as the medical devices, auto interiors, and propulsion systems businesses.

But to do that, he needs GM's help. Miller can only close plants or sell them if he gets a nod from the United Auto Workers and a deal with GM to take back workers or buy them out. If Wagoner, Miller, and the UAW can agree to major labor cuts at Delphi, an existing union pact would let Delphi hire workers at $14 an hour, one-third less than current wages. The lower wages would make some plants more salable. "We have labor costs that are noncompetitive," says Miller. "We're looking for assistance from GM."

Given its own financial problems, however, GM is hardly keen on simply handing cash to Delphi. Johnson estimates that buying out Delphi's workers today could cost GM $2 billion to $3 billion. "We don't have any easy solutions," says GM Vice-Chairman and Chief Financial Officer John M. Devine. "Frankly, subsidizing suppliers is not one of them." Yet GM has little choice but to bolster Delphi's health: It needs the company's parts and could get them cheaper if the supplier can cut labor costs. Says analyst Maryann N. Keller, principal of consultant Maryann Keller & Associates: "It's not a question of whether GM helps Delphi, it's how GM helps Delphi."

True enough. As Wagoner sits at the bargaining table trying to pry concessions from the UAW for GM's own problems, he must launch into an another thorny set of talks with Delphi. And in Miller, GM faces a tough and seasoned negotiator.

By David Welch in Detroit, with Michael Arndt in Chicago

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