Cerberus, the fund that owns the majority of Chrysler and has made other investments in Detroit, is blocking year-end withdrawals from one of its funds. According toReuters, "Cerberus plans to suspend year-end withdrawals for up to one year, founder Stephen Feinberg said in a letter to the investors of the fund." The firm will allow investors to take 20% of their year-end withdrawals out in cash, but that's it.
Obviously, Cerberus is being badly hurt by its investment in Chrysler and may get none of that money back if the company goes bankrupt or a government investment wipes out the car firm's obligations to its parent.
That raises the question of how much trouble Cerberus is really in. It has $27 billion in assets under management but it has put money into GMAC which is having trouble due to car and home loans. It could lose part of that money as well.
Cutting withdrawals from its funds may be a signal that other Cerberus investments have gone south. If matters get worse, it may end up being one of those fund groups that simply ends up liquidating itself and sending investors cents on a dollar. In this environment that is happening a lot. The Cerberus investments in Detroit may turn out to be its undoing.
One of the most common complaints about private equity companies (and activist investors, corporate raiders, etc.) is that their relentless focus on making a quick profit results in the looting of companies, job losses, and so on.
That theory will be tested in court: Mervyn's LLC has sued its former private-equity owners -- including Cerberus and Sun Capital -- alleging that their profiteering tactics led to the chain's bankruptcy. When the $1.26 billion deal was consummated in 2004, The Wall Street Journalreports that (subscription required) "the deal was structured as two separate transactions -- one for the retailer and a second one for the retailer's real estate. This complicated structure, the suit alleges, enriched the private-equity firms while leaving the retail operations insolvent."
The firms then sold off real estate, paid themselves dividends, jacked up lease payments, and essentially transferred value from the chain to the private equity buyers, according to the lawsuit.
This will be a must-follow case -- assuming it isn't settled quickly and confidentially -- for those looking to understand the larger effects of buyout shops. I'm skeptical of the notion that private equity firms destroy companies and if that was indeed the case with Mervyn's, it may have been a result of the complex structure and self-dealing.
In most cases however, there is little money to be made bankrupting something for which you pay hundreds of millions -- or billions.
Ford Motor Co. (NYSE: F) is cutting production at its Volvo unit, according to The Wall Street Journal. The move, which could affect one-third of workers -- some 700 -- is seen as an attempt to cut the costs and losses at the upscale Swedish brand.
The question everyone is asking is whether this move is done in preparation for a sale. According to "people familiar with the matter" who discussed such things with the Journal, CEO Alan Mulally is interested in putting Volvo, whose sales have been declining, on the block. Of course, to analysts, Mulally sang a different tune last month, saying the priority is improve the Swedish auto maker operations "dramatically."
As Kirk Kerkorian's Tracinda Corp. continues to build its stake int he company, he may also have a thing or two to say on the matter.
For now, Volvo is cutting where it makes larger, less popular vehicles, and it plans to make fewer cars overall. But can this make Volvo more profitable to Ford, or at least more attractive to buyers? There are costs associated with producing a smaller number of vehicles, but with Volvo reporting 22,000 fewer vehicles sold during the first quarter, cutting production makes sense. Another matter Ford has to consider is the massive losses it suffered lately just from the kronor-dollar exchange rate.
It was nearly a year ago that speculation ran amok that German carmaker BMW could be interested in buying Volvo. Could it still be interested? Years back, Renault was interested too. With the credit crunch still crimping deals, and with some major players like private equity -- keeping in mind Chrysler's sale to Cerberus -- absent, it's likely such a sale could be postponed.
After selling its Land Rover and Jaguar units to India's Tata Motors Ltd. (NYSE: TTM) in a deal worth $2.3 billion, and Aston Martin for $848 million to investors led by David Richards, if Ford sells Volvo, it will be left only with Lincoln as its luxury line.
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.
Back in late November, the stock price of Alliance Data Systems (NYSE: ADS) suddenly dropped more than 20%. The rumor was that Blackstone (NYSE: BX) was going to renegotiate its $7.8 billion buyout deal for the company.
Actually, the Securities and Exchange Commission is now investigating the matter.
Despite this, there is still some jitters with the deal. That is, an analyst for SunTrust Robinson Humphrey, Andrew Jeffrey, has downgraded the stock from a "buy" to "neutral." Basically, he's concerned about the slowing economy and the continued credit crunch. He thinks there's even a chance of a deal breakup, which could take the stock to the mid $40s.
Keep in mind that Blackstone recently ditched its deal for PHH Corp. (NYSE: PHH) because it was unable to raise the financing. As a result, the firm instead paid a $50 million breakup fee.
Interestingly enough, the Delaware Court may be more amenable for deal bust-ups as seen with the recent case between United Rentals (NYSE: URI) and Cerberus (check out this piece in The New York Times). In fact, according to M&A professor Steven Davidoff, the ADS merger agreement has some ambiguities that are similar to the Cerberus deal.
And the markets are showing some concern as well. In today's trading, ADS' stock price is down 1% to $72.99. The buyout price is $81.75.
By most accounts, the first part of 2006 was a private equity bubble -- or, more euphemistically, a "golden age" in the words of Henry Kravis.
But with the credit market dryer than it's been in years as Wall Street digests the record wave of buyouts, there's one question that lots of people are wondering about: which companies will be the big private equity failures? What firms paid to high a price for businesses in decline and, even with cost cuts and layoffs, will have trouble making interest payments?
The Wall Street Journal has a few ideas [subscription]: Apollo's buyout of Realogy, Blackstone's Freescale Semiconductor and, more recently, Cerberus' Robert Nardelli-run Chrysler.
Realogy, which owns real estate brokers like Century 21 and Coldwell Banker, has already run into problems with its lenders and the housing slowdown probably won't make things easier.
As we watch private equity buyouts end in disaster -- and make no mistake, some of them will -- I think a pattern will emerge. The failures will occur where private equity firms bought complicated businesses that weren't easy to understand, paid a high cash flow multiple for them, and bought hot companies in hot industries.
When these firms stick to their bread and butter -- boring but consistent performers in un-sexy industries -- they'll probably continue to do quite well.
H&R Block Inc. (NYSE: HRB) Chief Executive Mark Ernst today resigned as his efforts to unloaded the company's money-losing subprime mortgage business Option One Mortgage Corp. to Cerberus Capital Management LP nears collapse, according to Bloomberg News.
Former SEC Chairman and hedge fund manager Richard Breeden, who had long complained about losses at Option One and lead a proxy battle against the company, was named chairman and Alan. M. Bennett, a former CFO of Aetna Inc. (NYSE: AET), interim chief executive. H&R Block is conducting a search for a new CEO. Bennett has told the company he doesn't wish to be considered as a candidate, the company said in a press release.
Cerberus agreed to pay H&R Block $800 million for Option One in April, well under the $1.3 billion the company had hoped to get. Cerberus may scuttle the deal entirely now given the continued uncertainty of the credit markets. It's unclear what's going to happen to Option One which Ernst had said H&R Block may close if it couldn't find a buyer, Bloomberg said.
Shares of Kansas City-based H&R Block, which have slumped more than 17% this year, rose in pre-market trading. It will be interesting to see if Breeden will be able to help turn around H&R Block now that he's become an insider.
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.
The blind leading the blind. U.K. mortgage bank Northern Rock has almost gone under. If it were not for funds provided by the government, it might be gone already. But Northern Rock is still looking for help. In a twist of irony, that aid may come from Citigroup (NYSE: C), which has its own problems with mortgage instruments. The big U.S. bank said its earnings would drop 60% for the last quarter, some due to mortgage securities to write-downs.
According to a report in The Telegraph, there are several options being weighed to save Northern Rock. "One possibility being discussed by the Government and the company would see Citigroup, the U.S. bank advising Northern Rock, provide a funding line of up to £10bn to enable the board to run it for the long term."
The British government could also encourage a sale of the mortgage company to a hedge fund. U.S. hedge funds JC Flowers and Cerberus have expressed interest. But, a buyout from one of these firms is likely to be at a very low price that could wipe out public shareholders and some of the companies bonds.
If Citi does make the loan, it will be profiting from the mortgage problems of another company after taking a beating in the same market on its own. It would be a perverse twist of fate.
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.
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.
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.
United Rentals (NYSE: URI) has agreed to be acquired by Cerberus Capital for $34.50 per share in cash, a relatively small premium to the company's closing price of $32.37 on Friday. As recently as two weeks ago, the shares traded higher than the buyout price. Of course, United Rentals put a predictably favorable spin on the deal in a press release, stating that "The purchase price per share represents a 25% premium over United Rentals' closing share price of $27.55 prior to the company's announcement on April 10, 2007 that it had commenced a process to explore a broad range of strategic alternatives."
United Rentals is an equipment rental company with 690 rental locations in 48 states,10 Canadian provinces and Mexico, and has over 12,000 employees.
If you think that rental companies are a good fit for private equity firms and that competitors will see interest from buyout shops, you may want to look at Ryder (NYSE: R), which trades at a pretty similar valuation to United Rentals.
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.
Former U.S. Treasury secretary, John Snow, is now the chairman of private equity firm Cerberus Capital Management. He was fairly talkative today.
On CNBC, Snow mentioned that Cerberus has no plans to go public. Although, as we've seen in the private equity world, opinions can change quickly.
And, yes, he had some things to say about Cerberus' $7.4 billion purchase of Chrysler. Despite rumors to the contrary, he said the deal is on track. In fact, there are no immediate plans to sell it (but, again, keep in mind that opinions can change – especially if there is a pretty good offer on the table).
Interestingly enough, Snow believes that the auto industry is poised for a comeback. So why sell off the asset?
But, at the same time, Snow is very concerned that Congress's new fuel economy regulations will be detrimental to companies like Chrysler, Ford (NYSE: F), and GM (NYSE: GM).
He even thinks it could result in higher costs and capital requirements for the Chrysler deal. But Snow predicts the regulations will be softened.
Then again, he definitely needs to be upbeat. After all, Cerberus is going on a road show to raise billions for the Chrysler deal and the debt markets are getting a bit jittery right now.
Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
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One of the most common complaints about private equity companies (and activist investors, corporate raiders, etc.) is that their relentless focus on making a quick profit results in the looting of companies, job losses, and so on.
Ford Motor Co.
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.
Back in late November, the stock price of 
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There are stirrings that buyouts are making a comeback. Look at 
Private equity operators are crossing their fingers. Will the debt markets have enough capacity to fund the billions and billions of recent buyout deals?
Former U.S. Treasury secretary, John Snow, is now the chairman of private equity firm 
