Major Issues Overcome in GM-Chrysler Talks: Sources

General Motors and Cerberus Capital Management have resolved the major issues in a proposed GM-Chrysler merger, but the final form of any deal would depend on the financing and government support available, sources familiar with the talks said on Wednesday.

Both sides have agreed that GM Chief Executive Rick Wagoner would lead the combined automaker, the sources said. A merged GM/Chrysler would be the largest automaker by global sales.

As GM seeks some $10 billion in U.S. government aid to support the deal, Chrysler owner Cerberus is in its own set of intense discussions with banks to refinance Chrysler debt, the sources said.

The lending consortium—which includes JPMorgan Chase, Goldman Sachs, Citigroup and Morgan Stanley—has not made a decision yet, and talks are complicated because lenders have sold part of the debt to other investor groups, the sources said.

The banks hold the first-lien loan of $7 billion issued to finance the Cerberus buyout of an 80-percent stake in Chrysler from Daimler AG last year. Banks have been selling off parts of it in an effort to trim their exposure to risky leveraged buyout debt.

Cerberus and Daimler provided a $2 billion second-lien loan to Chrysler due to weak interest for that debt.

GM has been in talks with Cerberus about buying Chrysler since last month, but the discussions have been snagged by difficulty in securing investment or financing at a time when credit is tight and global auto sales are rapidly declining, others close to the talks have said.

A decision by the Bush administration to provide the government's first funding for the auto sector since the $1.5 billion bailout of Chrysler in 1980 has been widely seen as the merger's best chance for success.

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The United Auto Workers union has been approached by GM in the course of the talks with Cerberus, people familiar with the negotiations said.

As a condition of government support, GM has offered to merge the auto operations in a way that protects as many jobs and as much of the Chrysler sales volume as possible, sources have said.

Analysts have been skeptical that the merged automaker, which would control some 33 percent of the U.S. market, could be turned around quickly since GM and Chrysler are seen to be struggling with many of the same problems, including excess production capacity and too many dealers.

GM and Cerberus had no comment. A UAW spokesman had no immediate comment.

Global Sales Fall, Trail Toyota

GM said Wednesday that reduced demand in the U.S. and Western Europe helped push the company's third-quarter worldwide sales down 11 percent, as GM fell further behind Toyota Motor for this year's No. 1 global sales spot.

GM sold 2.11 million vehicles in the third quarter, while Toyota's sales for the period fell 4 percent to 2.24 million. The results bring GM's total sales for  January-September to 6.66 million vehicles compared with Toyota's 7.06 million.

GM said sales declines in the United States and Western Europe offset strong demand from emerging markets. Sales outside of the U.S. grew by 164,000 vehicles in the first nine months of the year.

Mike DiGiovanni, GM's executive director of global market and industry analysis, said the same economic woes that have resulted in steep drops in U.S. sales this year spread to western Europe during the recent quarter.

North American sales dropped 18.9 percent during the quarter, while overall European sales fell 12.3 percent.

DiGiovanni said that while sales growth in emerging markets may be slowing, it's still significant. GM reported third-quarter sales increases of 15.1 percent in Russia, 15.5 percent in Brazil, 12 percent in China and 5 percent in India.

"We can't overact to some of some of the snowballing effects that have happened in the markets these past few weeks," DiGiovanni said in a conference call. "There's a lot of positive fundamentals going on around the world that are laying the bed for future growth."

Sales outside of North America accounted for 61 percent of GM's total third-quarter sales, up from 56 percent in the same period last year.

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Japan-based Toyota has been vying with GM to be the world's biggest automaker by global sales. Last year, Toyota's group sales—including those from minicar maker Daihatsu Motor and truck maker Hino Motors—rose to 9.366 million vehicles, just shy of GM's 9.37 million.

Toyota's drop in third-quarter sales, which it also attributed to weak U.S. demand along with sluggish sales in its home country, marked its first year-over-year decline in the July through September period since 2001, the company said.

Toyota had posted strong U.S. sales earlier this year, as high gas prices drove consumers to its smaller, more fuel-efficient vehicles, but its September U.S. sales fell 32 percent.

For the first nine months of this year, GM's U.S. sales were down 18 percent, while Toyota sales were down 10 percent.

No Comment on Toyota

Separately, GM on Wednesday declined to comment on reports that it was considering seeking help from Japanese rival Toyota, but said executives "routinely discuss issues of mutual interest" with other automakers.

GM emphasized in its statement Wednesday that any conversations it may have had with Toyota were of a routine nature.

"As a policy, we do not confirm or comment publicly on those private discussions, which in many cases do not lead anywhere," GM said in a statement.

A Kyodo news report, citing sources familiar with the plan, said Toyota was expected to consider quick fixes for the cash-strapped GM, including buying up its assets and helping it secure sufficient business funds.

- AP and CNBC.com staff contributed to this report.

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