Despite the beating it has taken in Chrysler, private equity fund Cerberus has about $7 billion on the sidelines to put into bank assets, many of which are going for a fraction of their face value.
One expert commented in The New York Post "I think what you're going to see is the deep- value buyers coming in to get $1 for 50 cents," said Rick Maples co-head of in vestment banking and head of the financial institutions group at boutique investment firm Stifel Nicolaus.
In a perverse way it is good news for banks. At least someone will buy something from them, which should raise the value of their troubled assets over time.
Given the economic woes that have taken hold of this country, the general consensus is that Cerberus overpaid badly for Chrysler.
Now the infamous Robert Nardelli -- probably best-known for his $210 million golden parachute for leaving Home Depot (NYSE: HD) in disgrace -- is charged with making the best of it as the company's CEO.
Fortune senior editor Alex Taylor III takes a look at Nardelli's bold and aggressive plan to return the company to solid profitability. Nardelli is playing hardball with the company's suppliers and dealers. Parts suppliers who can't deliver will be dropped, and the company's dealer network will be dramatically reduced in size. Nardelli is also consolidating all the company's brands -- Jeep, Dodge, and Chrysler -- into single dealerships. Business just isn't good enough to support a stand-alone Dodge store.
In addition, Chrysler is making a bold move into China -- the company currently garners 90% of its sales from North America, but hopes to double its international sales over the next four years.
The problem for Chrysler is that the price Cerberus paid and the weak economic environment may make even the most impressive turnaround something less than a cash cow.
And if there's one thing I've learned from watching a fair number of turnarounds, it's this: most of them fail miserably.
GMAC, in which GM (NYSE:GM) sold a majority stake to Cerberus, posted another big loss. In the fourth quarter, the red ink flowed and hit $724 million.
According toBloomberg "GMAC said it's talking to buyers for parts of the Residential Capital mortgage unit, which recorded a $921 million quarterly loss.". Moody's has downgraded the ResCap senior debt.
By spending time in Detroit, Cerberus has managed to get ownership of a car company, Chrysler, just before what may be the weakest year in domestic vehicle sales in over a decade. And, in ResCap it has picked up a mortgage operation which is being hurt by the same delinquency problems that are roiling the industry.
As mortgage companies face a difficult year, the question becomes whether Cerberus will have to put more money into GMAC and ResCap.
Private equity firms tend to do well because they negotiate deals which are particularly favorable due to their ability to bring larges sums of cash to the table. Their armies of analysts should give companies like Cerberus an advantage in picking companies which will do unusually well.
Cerberus needs to get some new analysts.
Douglas A. McIntyre is an editor at 247wallst.com.
Chrysler currently achieves 90% of its sales from North America, but if the newly private company has its way, it will double its international sales over the next four years as part of its plan to return to profitability.
Rising gasoline prices, declining home values, and general economic malaise have further hurt the company which, along with the rest of the American auto industry, is struggling to compete with lower-cost overseas competitors.
According to The Wall Street Journal (subscription required), "To aid its international-sales expansion, Chrysler boosted the number of products offered overseas to 20 from nine. In China, Chrysler said it is reintroducing Dodge-brand vehicles after a 62-year absence. The Caravan minivan is in production. The Caliber hatchback and Avenger sedan are also slated to be sold in that country."
I wish Chrysler the best of luck because they're going to need it. The same problems that are dogging the company here should be exacerbated overseas -- It's hard to imagine why anyone in China will pony up the extra money to buy a Chrysler when there are so many cheaper options available over there.
The sale of $4 billion in debt supporting Cerberus Capital Management's purchase of Chrysler has been postponed. According to Bloomberg News via the New York Post, Cerberus's bankers could not sell the debt and so were forced to withdraw the offering.
No plans for repackaging this second round of debt have been announced. The failure once again to sell Chrysler debt raises serious questions about the viability of both the deal and the company. Back in July, John Snow, the Chairman of Cerberus, was quoted as admitting that "the market has lost some of its buoyancy," but he expected to sell all of the Chrysler debt: "We follow this closely, and the people handling the financing and dealing with the banks are committed, so we are confident that this will go through." No word from Snow this time around.
After some nervous moments in the last three weeks, representatives of the United Automobile Workers (UAW) union agreed to a new four-year labor contract with Chrysler, now owned by private capital group Cerberus Capital. The deal guarantees future work to much of Chrysler's workforce and hopefully puts to rest the October 10th six-hour walkout that's still fresh on the UAW's mind.
In reaching an agreement with Chrysler, the largest automotive union now can look forward to negotiating a deal with Ford Motor Co. (NYSE: F), as deals with General Motors (NYSE: GM) and Chrysler are now complete and in the books. The agreed-upon contract with Chrysler finally gained support at the plants that mattered, including the four larger Detroit-area car factories. Although some of the voting plants, such as a plant in Belvidere, Illinois, still had issues with the contract, the majority votes were enough to give it ratification as of late this weekend.
According to the UAW, roughly 56% of hourly workers and 51% of skilled trades workers approved the agreement as of this past Saturday evening. That's not a huge sweep of approval, but it was enough to put the negotiations to bed for the next four years.
At least for the next four years, Chrysler's union employees will have some sense of security as the automaker struggles to return to consistent positive performance under the ownership of a private set of investors. With Ford up next -- and obviously feeling pressure to mold a new agreement in the vein of the recent GM and Chrysler contracts -- the UAW still has its greatest test ahead.
Now that the United Autoworker's Union (UAW) is finished with General Motors Corp. (NYSE: GM) in terms of labor talks, next up to bat will be Chrysler LLC. The company is being acquired by private equity firm Cerberus Capital, but that's not stopping it from making vehicles and trying to dent into the domestic market share being rapidly enjoyed by Toyota Motor Corp. (NYSE: TM).
This past Sunday, the two parties began negotiating terms of a new labor agreement after nearly three weeks of stalling due to UAW's extension of Chrysler's existing contract so that the GM deal could be put to rest, which it was. UAW President Ron Gettelfinger now has his sights set on Chrysler and hopes that new ground can be broken with the Detroit automaker now that it has a new owner in a private investment firm (new blood, heh) along with the problem of slowing and stagnating sales -- a problem Chrysler has in common with GM and Ford Motor Co. (NYSE: F).
The broken-record syndrome currently facing all three domestic automakers is causing production plant idling and increased incentives to move out overloaded inventory just at a time when competitors like Toyota and Honda Motor Co. (NYSE: HMC) are increasing market share and are putting out highly competitive passenger vehicle models. Will Cerberus break new ground with its UAW labor talks that are significantly different from former parent Daimler (which still owns a 20% stake)? I'm thinking yes, or the company would not have bought the Chrysler brand for $7.4 billion in the first place.
Chrysler has been the No. 3 automaker in the U.S. for decades. It bought Jeep and American Motors along the way, and for over a decade was part of Daimler (NYSE: DAI). Over the last two years, the company fell on hard times and private equity fund Cerberus was willing to take a chance on it.
Cerberus has done a couple of things to improve the odds that Chrysler may actually be rebuilt. Hiring former General Electric Co. (NYSE: GE) and Home Depot Inc. (NYSE: HD) executive Bob Nardelli was an odd choice. But, under him the company has brought in the former head of Toyota's U.S. operations, as well as the former chief of GM in China. Neither executive could have come cheap.
A stronger Chrysler is probably a bigger threat to General Motors Corp. (NYSE: GM) and Ford Motor Co. (NYSE: F) than it is to any of the overseas auto firms. Chrysler still sells almost all of its cars in the U.S. It has aspirations of building beachheads in Latin American and China, but that could take a number of years.
Toyota Motor Corp. (NYSE: TM), Honda Motor Co. (NYSE: HMC), and Nissan are already squeezing sales from the two largest U.S. car companies. If Chrysler is going to regain sales quickly, it will have to do what it did under Lee Iaccoca, which is hurt its cross-town rivals.
Chrysler says it will keep all of its brands but cut back some of its models. The devil is in the details on that set of decisions. But, Ford and GM may have something new to worry about.
Autoblog informs us that Chrysler has hired a key executive from Toyota Motor Corp. (NYSE: TM). James Press, the top-ranking Toyota executive in North America, will join the Chrysler Group as Vice Chairman and President. The announcement was made by Chrysler earlier this morning, and you can read the press release at Autoblog.
At Toyota, Mr. Press' title was President and Chief Operating Officer of Toyota North America, and during his tenure Toyota made significant gains in the American market. Mr. Press is widely respected in the industry, earning the honor of being the first non-Japanese member of Toyota's board, as well as Automotive Executive of the Year.
This change at Chrysler, owned by Cerberus Capital Management since early August, has to be seen as good news. By all reports, Mr. Press loves cars (as opposed to finance or advertising, the preoccupations of most American car execs) and his experience with the world's best automaker should help Chrysler enormously. Interestingly, Mr. Press was quoted in The New York Times in April, when he was still at Toyota, as saying that Chrysler had "solid products" and a bright future. Maybe he knew then that Detroit would be calling for help.
Cerberus assumed 80% ownership of Chrysler from DaimlerChrysler (NYSE: DAI) on August 3. Cerberus is now engaged in contract talks with the United Auto Workers as it looks for ways to cut costs. The union is reportedly opposed to the sales for fear of job losses; the units employ roughly 1,300 unionized workers. Chrysler's four-year contract with the UAW expires on September 14.
Analysts are saying that the sale of the units would allow Cerberus to focus on Chrysler's core business of making cars and trucks, and help raise much-needed cash. But Mopar is hardly a peripheral unit. Chrysler has been using the term to refer to its parts since the 1920s, and Mopar has long been virtually synonymous with the automaker. This is especially true when it comes to high performance cars, including the famous muscle cars of the 1960s and 1970s -- the Barracuda, the Super Bee, the Road Runner -- that Chrysler is trying to revive. So you have to wonder if this is a good move in the long run. Let's hope that Chrysler doesn't lose what makes it unique and desirable to car lovers as it works to return to profitability.
Fortune has a way of ratifying a trend that has been underway just by reprinting conventional wisdom and slapping it on the front cover. That's what this article does, noticing as if for the first time in history what others have been saying for months: private equity is tanking.
Roughly a year ago, I asked whether private equity had peaked and my argument was picked up in Barron's. My belief back then was that firms were overpaying and borrowing too much money. Furthermore, many of the companies they took public were losing money for investors. Earlier this year I tried to persuade The Wall Street Journal's Alan Murray of this when he interviewed me for one of his columns. But he was not persuaded.
So what's next? What opportunities does the private equity bust create? It doesn't take a genius to realize that whoever benefited from the inflation of the private equity bubble will be hurt by its bursting. There's a big ecosystem around private equity. Hedge funds which buy junk bonds, private equity firms, investment banks, commercial banks, debt rating agencies, Manhattan real estate, and of course the companies whose stock prices were elevated by the possibility of being taken out by private equity -- all will suffer.
If you have any ideas for companies in these industries to short, please comment below. I'll be thinking about it and hope to post more later.
Two big private equity deals are having trouble getting banks to lend them money. This trouble reveals the essential function of private equity firms -- the ability to convince banks that the fees they'll get for financing deals exceed the risk of loss if the borrowers can't pay back the money. In the past, the banks would sell portions of the loan to other banks and investors to limit their risk. But the appetite for those investments is disappearing.
Perhaps the deal is not in trouble, but if it does go through, the terms might make it less profitable for Cerberus. For now, the five banks, led by JP Morgan Chase & Co. (NYSE: JPM), plan to take on about $10 billion of the debt and try to sell it later -- Chrysler and Cerberus will carry the other $2 billion.
The Wall Street Journal is reporting that the sale of $12 billion in debt related to the Cerberus Capital purchase of Chrysler Group from DaimlerChrysler (NYSE: DCX) has been postponed. Apparently the debt underwriters -- including J.P. Morgan Chase (NYSE: JPM), Citigroup (NYSE: C), Goldman Sachs Group (NYSE: GS), Bear Stearns (NYSE: BSC) and Morgan Stanley (NYSE: MS) -- have been unable to find buyers for the debt, which is part of a $20 billion loan package planned for Chrysler. The money will be used in Chrysler's production and finance operations.
This setback for the debt sale offers further evidence that liquidity is drying up and deals are becoming more expensive. Interest rates on these debt-fueled loans have been climbing rapidly, and are now headed toward 10% and higher. However, even at these rates, Cerberus's bankers had trouble finding buyers. As a result, the bankers will provide $10 billion in loans from their own pockets, with plans to sell the debt to the public at a later date. Cerberus and Daimler will kick in another $2 billion.
Cerberus and its bankers have stated that this financing problem will not delay the closing of the deal, which is scheduled for August 3.
Private equity operators are crossing their fingers. Will the debt markets have enough capacity to fund the billions and billions of recent buyout deals?
As a result of these concerns, there's quite a bit of attention on the massive deal for Chrysler, which is being spun off by DaimlerChrysler (NYSE: DCX). And according to a piece on Bloomberg.com, there are some bumps in the road.
On a $10 billion loan, the private equity firm Cerberus wanted to get a juicy rate of 3.25% above the London interbank rate. But there were not enough takers. So, the new offer is 3.75% over. And, as for another $2 billion loan, Cerberus tried to get 6% above Libor, but has now upped it to 7%.
This certainly seems reasonable. Despite the extreme liquidity in global markets, there are still limits.
Besides, Chrysler is not a slam dunk deal. The competition is brutal and the employee benefits are onerous.
Even so, it still looks like the deal is on track -- but it's not going to be cheap.
Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
Most of yesterday's reports on the sale of Chrysler to Cerberus Capital Management focused on the $7 billion DaimlerChrysler (NYSE: DCX) will receive in the sale. This represents a great loss for Daimler, which bought Chrysler for $36 billion in 1998. But when you look carefully at the deal, the story is much worse than that. Not only is Daimler not getting $7 billion, it is actually paying Cerberus to take Chrysler off its hands.
Both The Wall Street Journaland The New York Times (here and here) are reporting this story today. According to the press release on the deal, Cerberus is investing $5 billion in the new Chrysler company. This money does not go to Daimler. An additional $1 billion will be invested in the new company's financial arm, and none of that goes to Daimler either. So that accounts for $6 billion of the $7 billion deal.
That should leave $1 billion for Daimler -- but that won't end up in Daimler's pocket either. Daimler will loan the new company $400 million. And restructuring costs will come to over $1 billion. Daimler will also pay nearly $900 million in "prepayment compensation," whatever that is. In the end, Daimler will send something like $677 million in cash to Cerberus, along with another $900 million in other payments, for a total cash outflow of $1.6 billion.
In a way, though, this makes sense. Daimler is spending a small fortune to escape from a much larger $18 billion in obligations for health care and pensions that are attached to Chrysler. Once again, the bizarre health care and pensions systems in the United States -- which are hopelessly complex, expensive, and inconsistent -- harm the competitiveness of American manufacturers and the well-being of employees. It's not clear whether Chrysler will be able to make it on its own. But it is clear, once again, that the U.S. needs a new social safety net of national health insurance and decent pensions, one that will make it possible for Americans to build products that can compete internationally. Daimler doesn't have to worry about making health care payments, and neither should Chrysler -- or any other American company.
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Chrysler currently achieves 90% of its sales from North America, but if the newly private company has its way, it will double its international sales over the next four years as part of its plan to return to profitability.
The sale of $4 billion in debt supporting 
Autoblog informs us that Chrysler has hired a key executive from 
Analysts are saying that the sale of the units would allow Cerberus to focus on Chrysler's core business of making cars and trucks, and help raise much-needed cash. But Mopar is hardly a peripheral unit. Chrysler has been using the term to refer to its parts since the 1920s, and Mopar has long been virtually synonymous with the automaker. This is especially true when it comes to high performance cars, including the famous muscle cars of the 1960s and 1970s -- the 
Private equity operators are crossing their fingers. Will the debt markets have enough capacity to fund the billions and billions of recent buyout deals?
