General Motors Corp said on Monday it will shift $16 billion from an existing trust fund to a new entity that will take over $47 billion in health-care obligations for some 270,000 union-represented retirees.
GM said the deal will boost cash flow starting in 2010 and will represent $3.3 billion in savings by 2011, a year after the ground-breaking trust fund has begun operations.
GM also said it will be able to hire thousands of new factory workers at a total cost of $25.65 per hour compared with its existing cost of $78.21 under a just-ratified four-year contract with the United Auto Workers union.
In a presentation to analysts, the No. 1 U.S. automaker said it will transfer funds from a trust established as part of a 2005 deal with the UAW to a new Voluntary Employees Beneficiary Association (VEBA) trust. It was the first time GM detailed the funding for the new entity.
Financial analysts have said that the concession that allows GM to shift $16 billion in existing assets to the new plan will produce larger cash savings than initially projected as the automaker restructures.
GM shares surged to their highest level since 2004 on Friday, boosted by expectations the automaker could see bigger savings from the VEBA deal, considered the centerpiece of a four-year deal on wages and benefits with the UAW.
The stock fell 3.5 percent to $41.12 in Monday trading on the New York Stock Exchange.
I'd characterize the agreement as very fair for our employees and retirees, while at the same time significantly improving GM's competitiveness and largely eliminating a major risk on our balance sheet, GM Chief Executive Rick Wagoner told analysts Monday.
In its presentation, GM detailed the measures that will offset the cost of funding the $35.7 billion trust that will be responsible for paying for health care for union-represented retirees once the trust becomes effective in 2010.
GM will count $3.8 billion in wage and cost-of-living increases that would have been applied to fund a separate trust under a 2005 union-agreed cost-saving deal on health care toward the new VEBA trust.
That reduces total new funding for the trust to $31.9 billion. Also included is a $2.5 billion cash contribution, the $16 billion transfer from the existing trust and $4.37 billion in proceeds from the issuance of a convertible note, GM said.
GM said its liquidity will decline by $2.6 billion at the end of 2007 because of the funding. It expects an additional cash expense of $3.3 billion in 2008 from the initial expense of the deal.
GM said the VEBA funding assumed the new UAW-run trust would achieve asset returns of 9 percent annually in the face of health-care cost increases of some 5 percent.
GM and the UAW agreed on a new contract for some 73,000 active workers last month after a two-day strike.
The union clinched a similar deal last week with privately held Chrysler LLC, which is awaiting ratification by some 49,000 workers at the No. 3 U.S. automaker.
This latest round of contract talks were seen as crucial to efforts of the Detroit-based automakers to recover from combined losses of $15 billion last year.
GM, Ford Motor Co. and Chrysler headed into the talks seeking sweeping concessions to close a cost gap with Toyota Motor Corp and other Japanese automakers operating in the United States that is estimated at more than $30 per hour for the average factory worker.
The UAW must still work out a deal with Ford in negotiations expected to begin later this month.
(Reporting by Jui Chakravorty and Kevin Krolicki, editing by Jeffrey Benkoe)