GM deal: big stakes, questions

NEW YORK (CNNMoney.com) -- General Motors plants rumbled back to life Wednesday afternoon, after an early-morning labor deal with the United Auto Workers ended a two-day strike but left open some crucial questions about GM's future.

As the 73,000 UAW members at GM (Charts, Fortune 500) started returning to work, few had received any hard details about the groundbreaking labor deal that is expected to change the economics of the industry and the long-term relationship between the company and its retirees.

The details were also not available to investors and analysts, who nevertheless rewarded the company with strong stock gains and the possibility of a long-sought credit upgrade.

The deal between the union and the company was reached at 3:05 a.m. ET Wednesday after a marathon bargaining session in Detroit that started mid-morning on Tuesday. The process of ratifying the labor agreement is expected to begin by the weekend.

This much about the deal is known: It will usher in a groundbreaking shift of $51 billion in health care costs for retirees and their family members to union controlled trust funds.

GM has agreed to give the trust fund - known by an accounting acronym, VEBA - tens of billions of dollars of cash, stock and debt to cover future costs. It is believed that GM agreed to put assets worth a bit more than $35 billion into the fund, with the expectations that retirees' health care costs won't rise as fast as estimated, or that the fund's assets will perform well enough to cover the difference before it needs to pay out to retirees.

The exact amount that GM agreed to put into the fund, and the mix of assets, will be two key details weighed by industry analysts as they judge what the deal means to the company. While it is believed that GM will put some of its own stock into the fund, that won't be enough. GM's market value stands at a little more than $20 billion after being pounded by years of losses and declining U.S. market share.

The company said the deal was crucial to its efforts to restore its competitive position with nonunion rivals such as Toyota Motor (Charts) and Honda Motor (Charts).

Union President Ron Gettelfinger praised job guarantees and promises of investment in U.S. plants that it said GM made as part of the deal.

Chris "Tiny" Sherwood, president of Local 652 in Lansing, Mich., said he is looking forward to seeing details at meetings scheduled to start Thursday. He said most members were happy to go back to work, even if they were uncertain about the details agreed to by their leadership.

"We've got some people complaining about it already, but not many," said Sherwood. He said that the shift of retiree health care costs to union-controlled funds, the focus of most of the attention of auto experts and Wall Street analysts, was actually the least important detail to his rank and file.

"They're worried about the fact that they've eliminated the cost of living increases," said Sherwood, who said that members have heard rumors about what's in the deal. "They are worried about how the raises are in lump sums instead of increasing base pay. I understand why it was done that way though. There's talk about a two-tier wage system for some new hires. But nine out of 10 haven't mentioned the VEBA."

But the VEBA was very important to GM investors and other financial experts who follow the auto industry. Shares of Dow component GM gained $3.22, or 9.4 percent, in trading Wednesday on news of the deal, helping to lift the broader markets higher.

Credit agency Standard & Poor's, which has given GM debt risky junk bond status since May 2005, said it was now looking at whether to raise its credit rating, although it still would have a way to go before it achieved investment-grade status.

It is the first time that S&P has even looked at raising GM's credit rating since 2001. But S&P's statement said it is waiting to see details of the VEBA, and other terms of the deal, before it will act to raise the credit rating.

Some experts say they are confident the deal will help GM compete better.

"They would not have done a deal if they didn't get what they needed," said David Cole, chairman of the Center for Automotive Studies. "I think they've done a commendable job. It was not a simple agreement."

At the same time, the union appears to have won important guarantees that GM will continue to invest in U.S. plants, rather than shift more North American production to Mexico or Canada, or to growth markets such as China, said Erich Merkle, director of forecasting for auto consultant IRN.

"There wouldn't be anything keeping that money in the U.S. without the guarantees," he said. "There are a number of plants in the U.S. that would be on bubble if it wasn't for the UAW."

He cited the Hamtramck plant in Detroit, the Janesville, Wisc., plant and facilities in Moraine and Lordstown, Ohio, as those most at risk of future closure without promises to the union.

Still some analysts said the problems at GM go far beyond its labor contracts and have to do more with continued declines in market share and a lack of hot-selling vehicles.

Kevin Tynan, auto analyst with Argus Research, said he will keep his sell recommendation on GM stock even though he considers the UAW agreement to be a win for the company.

"No matter how aggressive the cost cutting gets, I'm not sold that is the answer for this company," he said. "Until they show me on the market share side that they're competitive, I'm going to stay bearish on the stock. You've got to do it in the showroom; that's where it counts."

Next up for the union are negotiations with U.S. rivals Ford Motor (Charts, Fortune 500) and Chrysler. More than 100,000 UAW members have remained on the job under contract extensions the last two weeks as their union concentrated on reaching a pattern-setting agreement with GM.

Gettelfinger said early Wednesday that he didn't know which company would be the subject of the union's next round of talks, but that he expected to restart negotiations with at least one or both by the end of the week.

Ford and Chrysler together have fewer UAW retirees and surviving spouses than does GM, thus limiting their combine liability to less than GM's potential $51 billion in costs.

But both companies could have trouble matching GM's offer. Neither is as far along in their efforts to cut costs and return their North American operations to profitability.

They also would have trouble raising assets to put into the funds. Ford's turn around efforts have left it heavily mortgaged, and it has an even lower total market value than GM does, although its shares gained 54 cents, or 6.5 percent in trading Wednesday.

Chrysler hasn't had publicly traded shares since it was sold by DaimlerChrysler (Charts) to U.S. private equity firm Cerberus Capital Management last month. The German automaker, which still owns nearly 20 percent of Chrysler, saw its shares close 0.2 percent higher in Frankfurt trading on the deal.

Meanwhile, the U.S. shares of Japanese rivals such as Toyota and Honda lost ground on news of the deal.