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.
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.