The control of a reorganized and potentially profitable U.S. auto parts maker Delphi Corp. may come down to a fight between its two largest shareholders.

How best to divide Delphi's value among bondholders, creditors and stockholders will become the main issue once the parts maker reaches crucial labor contracts with unions for its U.S. hourly workers and commercial deals with General Motors Corp., its biggest customer and former parent.

That could pit New Jersey-based Appaloosa Management LP, a major Delphi shareholder with about 9.3 percent, against Texas-based Highland Capital Management, which holds 7.8 percent, according to recent filings.

Delphi, which filed for bankruptcy in October 2005, long ago opted to pursue a $3.4 billion equity plan from a group led by Appaloosa and Cerberus Capital Management that would take a controlling stake in the parts supplier, although Delphi has said Cerberus is expected to depart from the group.

But Highland, a hedge fund whose $4.7 billion plan was rebuffed earlier this year, said in a filing Wednesday it met with Delphi and GM and signed a nondisclosure agreement to evaluate a possible transaction with Delphi, where Highland would be the lead investor.

Highland, which has called the current equity plan a sweetheart deal for its investors, had renewed requests for meetings with Delphi in April with the intention of exploring a possible alternative to the Cerberus-Appaloosa plan.

The initial Highland plan differed in key areas from the Appaloosa approach, such as eliminating preferred stock that would give the Appaloosa investors control of Delphi, expanding a shareholder rights offering and paying off bondholders.

We think there is a lot of interest among Delphi shareholders in a Highland-like proposal, and we believe that Highland will make a credible bid, CRT Capital Group senior analyst Kirk Ludtke said.

Delphi is one of the top auto parts suppliers globally and could have annual sales of about $21.2 billion once it completes the sales of some business units, Ludtke said.

Analysts have said if Delphi eliminates some non-core businesses such as its steering and interiors units and cuts some wage and manufacturing costs, it could return to profitability. For the first quarter of the year Delphi reported net losses totaling $381 million.

SIDES LINE UP

Delphi had been developing the Appaloosa investor group's plan for several months before announcing the plan in mid-December. But one bondholder, who requested anonymity, described Appaloosa's plan as low-ball for equity holders and unlikely to get voted through.

There should be a deal that sweetens the pot a little bit more for the equity and then hopefully they could be out of bankruptcy before the end of the year, the source said.

Delphi spokeswoman Claudia Piccinin said on Thursday: We have a responsibility to our stakeholders to explore alternatives with other potential investors.

Delphi has been aiming to file a reorganization plan by the end of July, and has not disclosed any deadline for receiving an offer from Highland or completing the revised equity plan.

However, Delphi appeared close to labor deals with the United Auto Workers and GM -- needed to complete its reorganization. A source familiar with the situation said on Thursday such a deal may be reached within a week.

GM spun Delphi off in 1999, but has continued financial ties with the parts supplier and its work force. The agreements cement parts contracts and make it possible to complete divestitures of several Delphi business units.

The most important thing that needs to be happening is a deal with the UAW, said the bondholder. Assuming that gets done ..., then it's a matter of one sponsor or another putting a deal on the table that can be approved.

It was unclear if Highland would bid alone or seek other investors. Highland disclosed in May that it had signed a confidentiality agreement joining Pardus Capital Management and Brandes Investment Partners in an investment -- but the revised filing did not include them.

It was also unclear if Appaloosa, Harbinger, Merrill Lynch and UBS -- all part of the team that made the December offer -- would seek other support.

Morningstar analyst John Novak said Highland's moves had to be taken seriously. They expressed interest six months ago and have remained interested. They clearly have been doing more due diligence behind the scenes and decided to move it to the next level.

Pardus and Brandes did not return calls on Friday seeking comment. Cerberus declined to comment.

(Additional reporting by Jui Chakravorty in Detroit)

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