It's the deal that has Detroit auto executives scratching their heads. Why is a high-flying New York investment firm buying four aged General Motors Corp. parts plants--especially plants so problem-plagued that GM included them among a dozen underperforming factories it dubbed "the uglies"?
The answer is that Joseph, Littlejohn & Levy, the buyout specialist taking over the GM plants, believes it can turn around fixer-upper auto-parts factories just as it has hospital, broadcasting, and chemical companies. In the past year, JLL has acquired interests in three auto wheel makers with combined sales of $1.4 billion, plus the four GM factories that together generate $1 billion in annual sales. With these buys, JLL has vaulted into the top ranks of the auto-parts industry. "We are not afraid of the automotive-components business," says JLL general partner Paul S. Levy. "We can make sense of it."
Maybe so, but the firm's mettle will be sorely tested by the GM plants, which are in Michigan and Ontario. GM endured a 20-day strike by the Canadian Auto Workers in October in part because it wanted to dump the Ontario plants so badly; it had said it would shut all the plants if it couldn't sell them. "We had too many mouths to feed," says Delphi chief J.T. Battenberg III. And if GM couldn't afford to invest more capital in them, who else would want plants that paid workers $43 an hour to make mundane products like door handles and seat covers? "Those plants are such a junk drawer of parts," says Sean P. McAlinden, a University of Michigan labor economist. "They make this stuff a lot cheaper in Mexico."
JLL, however, thrives on such challenges. Its biggest success was turning around the Republic Health Corp. hospital chain (since renamed OrNda HealthCorp), which has increased its revenues from $450 million to $3 billion since JLL acquired it in 1991. "That was our signature deal," says Levy. JLL's formula included closing six of the 11 hospitals, bringing in new management, and then expanding rapidly.
WHEEL DEAL. JLL only entered the auto industry 14 months ago with a $40 million investment in Motor Wheel Corp., which had struggled under debt incurred in a leveraged buyout. Last year, JLL merged Motor Wheel into Hayes Wheels International Inc., creating the world's largest wheel manufacturer. The merger, financed by $200 million in equity from JLL and other investors, hasn't been an unqualified hit: Hayes lost $6.1 million on sales of $556 million in the first nine months of 1996, mostly due to costs related to the Motor Wheel deal. But Levy says the deal makes sense because Hayes's aluminum-wheel technology complements Motor Wheel's strength in steel wheels. In December, JLL upped the wheel venture's European presence when it announced a $295 million buyout of the German wheelmaker Lemmerz Holding.
Meanwhile, in a deal announced Dec. 11, JLL teamed up with Edward J. Gulda, former president of brake manufacturer Kelsey-Hayes Co., to buy the GM plants. "I don't consider them uglies," Gulda says. "But there's lots of work to be done." For example, Gulda says the Livonia (Mich.) door-trim plant keeps several weeks'--rather than hours'--worth of raw materials on site, and stamping presses in the Flint (Mich.) window-parts factory routinely break down from poor maintenance. Gulda plans to rearrange floor plans for better inventory flow and beef up maintenance procedures. "We have to speed up the flow of work," he says. He's also bringing in several other Kelsey-Hayes executives to shore up management.
JLL won't say what it paid for the GM plants, but it expects to invest $20 million a year in capital improvements. Until 1999, JLL is bound by GM's contract with the auto workers, which will make wage cuts impossible. However, Gulda says an unspecified number of 5,500 workers at the plants will likely be trimmed. Workers have the option to return to GM, a deal similar to the one GM gave buyers of other parts factories it has shucked off.
Motown is watching JLL closely. GM has agreed to buy parts from the plants for several years, but the key to JLL's success will be getting contracts to supply Ford Motor Co., Chrysler Corp., and Japanese auto makers. If Detroit's newest auto-parts giant can get their business, buying the uglies might turn out to be a pretty good-looking deal.