Sept. 14 (Bloomberg) -- United Auto Workers picked General Motors Corp. for a possible walkout after its leader argued with the company over funding for a proposed union-run retiree health fund, people with knowledge of the situation said.

The UAW yesterday sent a bulletin to local unions labeling GM as the ``strike target'' a day after union President Ron Gettelfinger's confrontation with Troy Clarke, GM's North American chief. Gettelfinger previously said such language was no longer useful in negotiations. The union's contract with Detroit-based GM, the largest U.S. automaker, expires at midnight.

Analysts say GM was the logical choice for the UAW's focus because it's stronger financially than Ford Motor Co. or Chrysler LLC. GM also would be the biggest contributor to the unprecedented fund, and the confrontation on that issue escalated GM's importance for a union trying to salvage gains from an industry that lost $15 billion last year.

``The hour is late and tempers are short,'' said Harley Shaiken, a labor analyst at the University of California at Berkeley. ``Wall Street analysts have been saying a strike this year is impossible. The union is saying: `If you push us enough, you could be seeing picket lines.'''

1998 Strike

Negotiations at the UAW-GM training center in Detroit resumed this morning and are continuing.

Union members at UAW Local 909 in Warren, Michigan were readying picket signs tonight while waiting a call from the national representatives letting them know if they'd be out on strike that could come anytime before midnight, said Al Benchich, UAW Local 909 president.

``My guess is that they will settle,'' said Burnham Securities Inc. analyst David Healy in Sierra Vista, Arizona. ``Even if they had a short strike, they could handle it in stride, anything from a couple of weeks to a month.''

The last UAW strike against GM was in 1998 at two Flint, Michigan, parts factories. It forced the closing of 26 of the automaker's 29 North American assembly plants. That strike also canceled production of 318,000 cars and trucks and cut profit by $1.3 billion.

The prospect of the UAW transferring retiree health care to a union-run fund sent GM shares up 10 percent yesterday, their biggest gain since April 2006. GM's shares rose 93 cents to $34.22 at 4:01 p.m. in New York Stock Exchange composite trading. GM bonds gained 0.5 cent and the yield fell 0.07 percentage points.

Stormy Past

The UAW's move means it will concentrate on negotiating a new contract with GM. The union would then try to impose the basic terms of a GM settlement on Ford and Chrysler.

The outcome is pivotal at GM because it would lose revenue and sales momentum should an impasse trigger a strike. At the same time, failure to reduce spending on labor would hamper Chief Executive Officer Rick Wagoner's goal of cutting fixed costs to 25 percent of revenue by 2010, from about 30 percent now.

While GM was expected to be the union's choice, the term ``strike target'' was uncharacteristic. It was authorized, the people said, by Gettelfinger in lieutenant Cal Rapson's bulletin in the wake of the dispute with Clarke. Since becoming president in 2002, Gettelfinger has described the words as outdated relics of the union's stormy past.

GM's Hope

``GM is the strongest of the three automakers,'' said Pete Hastings, a fixed-income analyst at Morgan Keegan & Co. in Memphis, Tennessee. ``There is uncertainty about Cerberus at Chrysler, and Ford is clearly weaker than GM.'' Chrysler was purchased last month by Cerberus Capital Management LP, a New York-based private-equity firm.

GM had hoped to be the target in part because it's carrying a heavier retiree burden than Ford or Chrysler, and attaches a higher priority to altering its health-insurance plans as a result, said Dan Luria, an analyst at the Michigan Manufacturing Technology Institute in Plymouth, Michigan.

When talks opened in July, GM had 4.61 retirees and surviving spouses for each active worker, compared with 2.1 for Ford and 0.62 for Chrysler, according to the UAW data.

Also, GM lost $1.98 billion last year and has made a profit for three consecutive quarters. Ford had a record loss of $12.6 billion, and Chrysler had a deficit of $680 million.

``GM is in the best financial shape of the three,'' Luria said. That means it's best positioned both to withstand a UAW strike and eventually to agree to the union's demands, he said.

Tradeoff

Gettelfinger, 63, would rather avoid a strike because it could poison his efforts to organize non-union workers at Japanese-owned companies such as Toyota Motor Corp. and Denso Corp., said Luria.

In return for the union's acceptance of the fund, Gettelfinger asked the companies to contribute 70 percent of their retiree health-care liabilities to get the program started, while the automakers offered 55 percent, people with knowledge of the negotiations said.

The automakers don't break out specific liabilities for just union retirees, although the union members make up a bulk of the costs. If the difference between the UAW and GM positions were applied using the full $114 billion liability, the companies would put $63 billion into the fund under their proposal and $80 billion under the UAW's, leaving a $17 billion gap.

UAW spokesman Roger Kerson and GM spokesman Dan Flores declined to comment on the talks.

Shrinking

A strike would threaten a GM's financial comeback. In addition, sales gains from new products such as the Buick Enclave may stem a slide that has seen GM's U.S. market share plunge to 23.2 percent from 44 percent in 1977. As GM gave up ground to Asian competitors led by Toyota, the union forced the automaker to shrink through early retirements instead of firings.

By last year, the company had 80,758 workers supporting 357,000 retirees and surviving spouses, compared with 354,577 workers for 36,381 retirees in 1964.

The UAW had 538,448 members last year, down from 1.5 million in 1979.

Recognizing the automakers' need to trim costs to survive, Gettelfinger decided not to oppose the health funds, known as Voluntary Employee Beneficiary Associations, or VEBAs, the people said.

``Gettelfinger has accepted the idea of a VEBA in principle; the Rubicon has been crossed,'' labor analyst Shaiken said. ``A VEBA may mean the least risk today if the alternative is letting one of these companies slip into bankruptcy and having the benefits go up in smoke.''

Midnight Deadline

The UAW has retained Lazard Ltd., the New York investment bank led by Bruce Wasserstein, to provide advice on negotiating the VEBA.

``The two things that concern me are the VEBA and the two- tier wage,'' said Benchich, whose members make transmissions. ``Some of those VEBAs have already gone bankrupt. And they are talking about starting it out only 65 percent funded. What happens if it starts to run out of money?''

Contracts covering 180,681 active workers and 419,621 retirees and surviving spouses at GM, Ford and Chrysler were set to expire at midnight tonight. The GM deadline still stands; Ford and Chrysler yesterday agreed to continue to operate under indefinite extensions.

During 2003 negotiations, the Detroit-based union announced a pattern-setting agreement with Chrysler one day after its contract ended. In 1999 talks, the first accord came two days after expiration.

``The last couple of contracts have extended a little beyond the normal expiration date,'' GM CEO Wagoner, 54, told WJR-AM radio in Detroit this week. ``It's important we don't get obsessed with this Friday.''

Worker Reassurance

In his statement to UAW locals yesterday, Rapson promised long hours of bargaining. ``There is still much to be done and difficult issues to tackle,'' he said. ``We are fully focused on reaching a tentative agreement that meets the needs of our active and retired members.''

To reassure workers who must vote on any contract, the UAW wants the automakers to agree to replenish the fund if health- care costs rise faster than projected, a person familiar with the talks said. One possibility is a separate fund, with a capped contribution rate from each company, that the two sides could allocate for other purposes if it's not needed for retiree medical coverage, the person said.

Another issue is how automakers pay their initial contributions. In a Sept. 10 note, JPMorgan & Chase & Co. analyst Himanshu Patel estimated that 10 percent to 20 percent will be in the form of equity, equity-linked securities or a combination of the two, which would be sold to the public.

Seeking Guarantees

The amount of the funding also depends on future numbers of active workers and retirees at each company, one of the people said. At the start of the talks, GM's active employees included 73,454 UAW members, and Ford's included 58,300. Both companies are considering offering buyouts and early retirement incentives as part of new contracts, one of the people said.

The UAW is seeking guaranteed investments in U.S. plants with union workers in return for the retiree fund, the person said.

The union also is pressing the automakers to ask their suppliers to bring work into UAW-represented factories that would otherwise lose jobs, one of the people said.

At a May 2 meeting in Detroit, the UAW's Rapson told union officials that gaining members at suppliers may require rethinking traditional opposition to two-tier wages, or paying less to new employees than older ones, the person said. The union hopes workers who start at lower rates eventually can transfer to higher-pay jobs.

The company's 8.375 percent bond due July 2033 rose 0.5 cent to 83.5 cents on the dollar, according to Trace, the bond- price reporting system of the NASD. The yield is 10.19 percent.

GM credit default swaps rose by 12 basis points to 673 basis points in New York, signaling that investors now consider the company at greater risk of defaulting on its debt. A basis point on a credit-default swap contract protecting $10 million of debt for five years is equivalent to $1,000 a year.

To contact the reporter on this story: John Lippert in Southfield, Michigan, at jlippert@bloomberg.net; Bill Koenig in Southfield, Michigan, at wkoenig@bloomberg.net

Last Updated: September 14, 2007 22:22 EDT