Chrysler's Future
Private Equity Looks into the crystal ball
By blackhedd Posted in Economy — Comments (14) / Email this page » / Leave a comment »
The Associated Press has a story out this morning about the Chrylser unit of DaimlerChrysler. There's been a hard-to-miss flurry of speculation about this business ever since Daimler chairman Dieter Zetsche said last week that all op-chuns ah awn de table for de fu-chah off Chrysluh, including a possible sale of the entire unit.
The point of the wire story is Volkswagen AG's announcement through a spokeswoman that they are not interested in buying Chrysler, if indeed it is for sale. What interested me far more is the indications of interest from a set of players that I've long predicted will step up to the plate.
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I've been curious about the Chrysler unit's financials for quite some time now. Just as you would expect, Daimler is planning to offer detailed financial information about Chrysler only to parties with a serious interest in acquiring the unit, according to the Wall Street Journal. Darn it. That makes it hard to be particularly intelligent about what can or should go down.
We get tidbits of analysis from AP's reporter, who speculates that Chrysler kept Daimler profitable during 2005 while Mercedes was having its well-known quality problems. (I've said it before: Mercedes makes the worst cars in the world.) That kept its position within the group secure. More recently, Chrysler has had far weaker earnings due to sharply contracting North American sales (down 7% in the fourth quarter). Chrysler swung to a $1.47 billion loss last year. Hence, evidently, the desire to slap some lipstick on the pig and bring her to market.
There are a lot of reasons to sell off an asset like Chrysler, but the one that makes the most sense to me is that the group is ultimately healthy, even considering the marketing problems that are being blamed for the sales shortfall.
Having said that, I can't imagine a scenario in which Chrysler would be acquired by another automaker, anywhere in the world. There just is no mesh of capabilities or assets with anyone else in the world. Domestically, GM and Ford Motor have a lot of the same problems as Chrysler, so an acquisition solves nothing for either of them. Besides, Ford has far better uses for their scarce capital, and GM has nothing but wampum anyway.
But in point of fact, GM, Ford and Chrysler all have a lot of world-class engineering, marketing, and production capability. (In the latter category, they also have a lot of frowsy old capacity that needs to be scrapped.) Who is in the best position to actually do something with these assets?
My answer for a long time has been private equity. In fact, I've had several conversations in the last year with PE players, and I'm confident an auto-industry play is on the radar. Sure enough, from the AP story:
The car maker and its investment bank, JPMorgan Chase & Co., are working together to explore a sale, the paper reported, citing only people familiar with the matter.
Meanwhile, at least four private-equity groups have had preliminary talks about buying Chrysler, according to a report in the Financial Times newspaper.
Apollo Management, the Blackstone Group, Carlyle Group and Cerberus Capital Management, along with several European private-equity groups, were contacted about a potential buyout before DaimlerChrysler announcement, the newspaper said, also citing people familiar with the matter.
The usual suspects. This is starting to make sense. I have no information about how far any of these talks went. If I find out anything I'm allowed to say, I'll write more here. I will predict that what's good for Chrysler is good for GM. Ford is different, because they're basically solvent. They will get an opportunity to clean up their act, or go out of business slowly.
I don't have the data that would indicate an acquisition price for Chrysler. But take a look at GM: total shareholder equity about $20 billion, give or take (it's been up quite a bit in recent weeks), with cash just a bit below that, and about $42 billion in debt. I shouldn't be guessing what it would take to eat the whole taco, but it's probably in the region of $35 billion, maybe a bit more. (I'm assuming the debt will be restructured or syndicated. I'm also assuming relatively little use of leverage.) Even if I'm wrong by a few billion dollars, it's entirely within the realm of possibility.
So what's your strategy if you're Carlyle, Bain, Apollo, Pacific, or a partnership thereof, and you want to own Chrysler or GM? First thing is to ditch the union contracts, possibly through a bankruptcy. The goal would not be to cut wages or benefits, but rather to close down all of the outdated, dead-meat production facilities that are being kept open because the UAW says so. A huge amount of the Big Two-and-a-Half's annual production is fleet sales of uninteresting vehicles because they need the revenue to cover their operating costs.
Next, get smaller and start focusing on marketing, which Detroit does very well, notwithstanding all the uninformed complaints you will hear about them not being able to make vehicles people want to buy.
The get-liquid strategy if you're a PE player is to spend a small number of years cleaning up the asset, and then flip it back out to the market. For several reasons, I hope that's not how this plays out, but that's the private-equity business model, and tigers don't change their stripes.
Next week, I'll post something here about Toyota, which is having to deal with a different class of problems, the ones engendered by success.
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Chrysler's Future 14 Comments (0 topical, 14 editorial, 0 hidden) Post a comment »
That will never happen. Busting the UAW is a fight I would never sign up for, if I had a mind to buy GM or Chrysler. I'm suggesting that bankruptcy can be used as a tool to modify labor contracts so that inefficient, excess production capacity can be disposed of.
Bankruptcy is not an option without a change of control, because it's an admission of management failure, and management will never do that unless forced to by new ownership. I am suggesting that the business case for an acquisition of either GM or Chrysler depends on being able to modify the labor agreements. If I were a partner at Bain or Carlyle or Blackstone, I would be trying to determine, down to the last detail, how this would go down. Otherwise, no deal.
1. Outdated capacity they need to close down (kinda like military bases...) and you've covered that one well.
2. The top heavy structure of the organizations. Bottom line, too many layers of management and no real leadership.
A BK will effectively take care of both of those.
3. Legacy cost of their retirees. I think GM's legacy cost is something like $1,500 per car. I see this one as an almost intractable problem. If they hack retirement benefits in a BK, they get pounded in the press. The nightly news will have interviews with GM retirees on welfare, eating dog food every night. I suppose they could swallow hard and do it, I just don't see it happening and I don't see any other way around it short of a Congressional bailout. Any thoughts on it?
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Congressmen who willfully take actions during wartime that damage morale and undermine the military are saboteurs and should be arrested, exiled, or hanged. — J. Michael Waller
...such as a PE buyout is that a whole lot of creative things can be done in regard to these problems. If I had to guess wildly, I'd say that a buyout syndicate could divide and conquer. Handle the overcapacity issues by getting a bankruptcy judge to tell the union to suck it up or die. Handle the retirees by quietly negotiating a deal with the PBGC. Keep Congress out of it, except to the degree that relevant committee chairmen and Michigan legislators will have to get a pound of flesh.
When it's all done, line up some substantial new financing from Japan and China, and start marketing.
2008 Press Release: Announcing the New Chrysler Corporation!
UAL managed to dump some amount of its retiree obligations on the PBGC and I haven't see much outrage there. I figure it is inevitable that all the domestic automakers will eventually head down that same road.
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Underlying most arguments against the free market is a lack of belief in freedom itself. - Milton Friedman
I didn't mean blow off the union's entirely. I meant as much as possible via some mechanism. The whole thing is dicey, though. My parents are losing their health insurance as a result of a shady spin-off designed to dump legacy costs. It's upsetting, even if I sort of understand it. He was an engineer for decades with Monsanto. They spun off Solutia and Solutia tanked, conveniently loaded up with legacy costs.
If Volkswagen isn't interested, is it still possible that Audi AG might be?
I was just wondering if there was any kind of weirdness going on there, in the sense of a German company being deliberately "overspecific."
Dell should buy Chrysler, uproot the company from Detroit to Houston or Austin where there are more favorable labor laws, move production to the Rio Grande Valley, transform the company, and use the combined company to more fully integrate technology into automobiles.
They should have tiny dealerships in metropolitan areas where they have company-owned facilities where you can test drive all of the models, and then either order it online or go home and order the car you want online. :-)
My understanding is that Detroit's problem is that it has a $2000+ increased labor cost on every vehicle versus Japan. That would mean that you have to cut some corners on quality or some other factor to come out. To me that disadvantage would seem debilitating. I suppose that's why you say they've got to find a way to blow off the unions.