bloggingbuyouts

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.

Stephen Feinberg, the head of Cerberus Capital Management, is famous for his secretive ways and dislike of publicity. In the September 2007 issue of Portfolio, he was quoted as saying; ""We try to hide religiously . . . If anyone at Cerberus has his picture in the paper and a picture of his apartment, we will do more than fire that person. We will kill him. The jail sentence will be worth it."

While a courtroom is a far cry from his no doubt plush Manhattan apartment, Feinberg seems to have violated the spirit of his own command -- today, you can see his photo over at Deal Journal. It seems that the ongoing legal dispute with United Rentals Inc. (NYSE: URI) has forced Feinberg to appear in public -- or at least a courtroom, where his image was captured for all to see.

The legal battle between Cerberus and United Rentals is about just how much Cerberus owes URI for walking away from a deal to buy the company. Feinberg says they owe no more than $100 million, while URI claims that Cerberus should be forced to complete the deal -- and thereby lose something like a billion dollars, given the recent decline in URI's stock.

The outcome is very much in the air, but at least we now know what it takes to get Feinberg to break his own rule about publicity: his photo fee would seem to be in the $1 billion range.

Shareholders at United Rentals Inc. (NYSE: URI) have a right to be mad. Hedge fund Cerberus Capital Management offered to buy the company. Shares rose from about $27 to over $34.

Then Cerberus walked. United Rental stock fell to $20.76 and has not recovered much. The entire matter headed to court. The legal battle was to begin today in Delaware Chancery Court. That has been delayed while the two sides talk.

Cerberus said that it was within its right to break off the contract. According to The Wall Street Journal, "the delay could help United's flagging stock price, as well as clear up some of the negative public perception of Cerberus, a Wall Street buyout shop that provided little detail for why it walked away from its agreement."

In other words, it may have been in the financial interests of Cerberus to walk out, but its may be a shaky legal ground.

Private equity firms have broken a number of these buyouts now, and, in some cases, contracts allowed them to do so. The court system is likely to catch up to them at some point soon. If settlement talks with United do not work out, it may be in this case.

Just one announcement that an LBO shop has had to pay hundreds of millions in damages would send a real shudder through the industry.

Douglas A. McIntyre is an editor at 247wallst.com.

The whole private industry is in a slump after the heady days of easy credit but Cerberus Capital, one of the elite firms, has it worse than most.

The firm has run into problems with its deals for Chrysler and GMAC, the financing arm of General Motors -- the deal for GMAC came just at the top of the consumer credit bubble. With economic woes figuring to extend well into the future as consumers struggle to pay their mortgages, it could also be a tough time for the auto industry.

Cerberus insiders told BusinessWeek that they're not panicking, and this rough patch could be a major test for the firm and industry as a whole. GMAC and Chrysler are deeply troubled companies -- probably more so now than when Cerberus acquired them. These aren't going to be quick flips, and Cerberus didn't buy them at bargain basement prices, so there isn't much margin for error.

Private equity firms have been lauded for their ability to engineer difficult turnarounds that are impossible under the demand of meeting quarterly earnings. But critics have argued that the industry is mostly about financial engineering.

If Cerberus can turn Chrysler and GMAC into companies that make the acquisitions look a lot smarter in five years than they do now, they'll have done a lot to prove the naysayers wrong.

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.

This is not the first time Chrysler buyout debt has failed to sell. Back in July, bankers were forced to postpone the sale of $12 billion in debt. According to Bloomberg, the bankers -- 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 a new plan to sell that debt for 97.5 cents on the dollar.

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.

Yesterday, United Rentals Inc. (NYSE: URI) published an ominous press release saying that its private equity sponsor, Cerberus Capital Management, "is not prepared to proceed with" the $7 billion transaction. Of course, with the uncertainty in lending markets, this should not necessarily be a surprise. Nonetheless, the shares of United Rentals plunged 30%.

United Rentals is the largest equipment rental company in the US. Annual revenues are about $3.7 billion and EBITDA is about $1.1 billion (which is always something private equity folks like to see).

If you take a look at the merger agreement, the break-up fee is $100 million. That's a pittance for Cerberus. In other words, if the cost of financing has spiked -- making a deal much more expensive -- why not just pay the $100 million? But the question is: may United Rentals have a case for requiring the deal to get done? Well, that's where things get fuzzy. I'm really not sure.

That's a good question for attorneys. And, yes, United Rentals has retained Orans, Elsen & Lupert LLP. So we may see showdown in the Delaware courts. If you want to see a great analysis of the legal argument, you can check out the M & A Law Prof Blog.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements.

Ford (NYSE: F)'s negotiations with the UAW should be over soon. If it gets a deal that looks like the ones the union put together with Chrysler and General Motors (NYSE: GM), the No. 2 car company should have labor costs much closer to its Japanese rivals. It may have to put $20 billion into a health-care fund for the union, but the firm has almost twice that much cash on its balance sheet.

The New York Times has pointed out that the sale of Ford unit Jaguar is going much slower than expected. The paper says: "Ford's bidding date is now Oct. 30, a person involved in the process said Thursday. That is a month later than bidders originally thought they would be making offers." Several private equity firms -- including Cerberus Capital Management, Terra Firma, and Texas Pacific Group -- as well as India's Tata Motors are rumored to be interested in the British car company and another Ford unit, Rover.

But, taking a step back for a moment, Ford may not sell the Jaguar unit at all. The U.S. company may have needed the money if the UAW payment was going to be onerous. But, the funding of a union benefit plan now seems within Ford's means. It is entirely possible that the car units were being shopped in case Ford needed the money. Now, it does not.

Ford management should have a look at the fact that if a private equity firm can turn Jaguar around, then a big car company should be able to do just as well. If Ford can't get a premium price for Jag, it should not sell it.

Douglas A. McIntyre is a partner at 24/7 Wall St.

There are stirrings that buyouts are making a comeback. Look at private equity firm, Cerberus Capital. Today, the firm has announced that it will shell out roughly $2 billion for the North American paper operations of Stora Enso (Stora Enso will retain a 19.9% equity stake).

The deal is fairly strategic as Cerberus already owns NewPage, which is a coated paper producer. As a result, Cerberus will merge the Stora operations with NewPage. Yes, having scale can be a huge benefit in the private equity world – in terms of financing and synergies.

However, the paper business is tough. With the declines in newspapers and magazines, it's certainly hard to find growth.

But Cerberus usually is contrarian. Hey, it bought Chrysler, right?

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He also operates DealProfiles.com.

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.

H&R Block's (NYSE: HRB) sale of its subprime lending unit to Cerberus Capital Management is in trouble, according to a Reuters report in The New York Times.

In the original deal, announced in April, Cerberus agreed to pay H&R Block as much as $800 million for Option One Mortgage Corp., which focuses on subprime loans. This price represents a significant discount on the price H&R Block was originally looking for, said to be $1.3 billion. But with the ongoing and increasingly severe problems in the credit markets, even that discount may fail to justify the deal.

The Reuters report indicates that Cerberus may be interested only in Option One's loan servicing unit, rather than the whole company. While Option One is apparently a money loser, the loan servicing business holds some value. Whatever the outcome of the Cerberus deal, H&R Block announced that Option One will no longer make loans, and will concentrate on servicing existing loans.

Cerberus Capital Management may sell some of Chrysler's non-automotive units, according to Bloomberg. The units in question are Mopar, Chrysler's famous service and parts producer, and Chrysler Transport, which manages deliveries to the automaker's plants.

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.

Tribune(NYSE:TRB) volatility is at 18-year high as Sam Zell attempts to complete the buyout. Sam Zell announced on 4/2/07 his group would pay TRB shareholders $34 per share. TRB is recently down .27 to $26.67. The expected closing is expected in the fourth quarter 11/15/07. TRB overall option implied volatility of 41 is above its 26-week average of 23 according to Track Data, suggesting larger price risks.

Archstone-Smith Trust:(NYSE:ASN) volatility is elevated as arbitrage spread widens. ASN, is an owner or had an ownership position in 344 communities, representing 86,014 units as of 3/31/07. ASN is recently down $1.02 to $55.48. Tishman Speyer and LEH expect their $60.75 cash purchase of ASN will close on October 5th. ASN December option implied volatility of 25 is above its 10-week average of 13 according to Track Data, suggesting larger risk.

Affiliated Computer Services(NYSE:ACS) volatility Up; Exclusivity agreement extended. ACS, the world's largest processor of student-loan payments, is recently up .92 to $48.37. ACS announced Exclusivity agreement dated 3/20/07 between founder Darwin Deason and private equity fund Cerberus Capital Management has expired. The Exclusivity Agreement is now in effect & expires on 11/14/07. A special committee of ACS board of directors are expecting to make a recommendation of all strategic alternatives in due course. ACS October call implied volatility of 42 is above its 26-week average of 20 according Track Data, suggesting larger fluctuations.

Daily M&A Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.

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.

Cerberus Capital Management and Kohlberg Kravis Roberts & Co. are both suffering this morning. The New York Times [registration] reports that Cerberus is not able to raise the $5 billion in debt it needs to finance its takeover of Chrysler. The snag is a result of investor unwillingness to accept the terms for $12 billion in loans and "does not jeopardize the deal."

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.

Darwin Deason is the founder of Affiliated Computer Services (NYSE: ACS) and still owns a hefty 42% of the company. He is also in the process of buying out the company and has partnered with the private equity firm, Cerberus Capital Management.

But some investors thought the buyout is a raw deal. Why? One big concern: there is no "go shop" provision, which allows other bidders to come to the table (without big breakup fees and penalties).

So, today ACS disclosed that there is a "go shop" and the deadline is August 19, 2007. Lazard (NYSE: LAZ) will handle the process.

This is a decent amount of time. However, it's never easy to get a deal done during the summer. Besides, it's usually the case that a "go shop" doesn't amount to much anyway.

But Wall Street has some hope. On the latest news, ACS's stock price increased $1.53 to $59.79. The current buyout offer is for $62 per share.

Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.

BCE Inc. (NYSE: BCE) rose another nearly 4.5% today after The Globe and Mail reported a possible bidding war for BCE. The consortium of Canadian pension funds, led by Kohlberg Kravis Roberts & Co., might soon have two other groups considering the same deal.

To remind you, first there were rumors BCE is in talks with buyout firms. Then came a denial, followed closely by an acknowledgment: BCE is indeed considering taking the company private. Here are the reported players:

• KKR is considering taking control of one-third of the company with partners Canada Pension Plan Investment Board and two other pension funds, thus fulfilling the required majority Canadian ownership.
  
• Ontario Teachers Pension Plan is apparently assembling its own consortium and preparing to formally enter the bid process early next week. The group is said to be financed by Citigroup Inc. (NYSE: C) among others.
• And just to make shareholders happier, it is reported that two more U.S. private equity firms, giant Blackstone Group LP and Cerberus Capital Management LP, might form a third group. How this group would abide by the majority Canadian ownership law is still unclear, although Caisse de dépôt et placement du Québec might be shifting allegiances.
• Last time I also mentioned a possible merger between Bell (BCE) and smaller rival Telus Corp. (NYSE: TU). This might be more difficult from a regulatory point of view.
  

So far it seems that the groups are aligning themselves and preparing financing as "BCE has not prepared the data rooms that bidders need before deciding what they are prepared to pay."

After BCE closed up some 6% and Telus up over 3% during my last post, I was going to ask if you think hubby should sell his shares in both these companies. He wanted to sell all, I talked him down to selling half, but then he never got around to it. Lucky, or he would have missed today's 4.5% and 2.3% run for BCE and TU respectively.

Thank you Don for the FT link this morning.