Cerberus's Tower IPO Poised for Profit After Losing Chrysler
Cerberus Capital Management LP, whose investment in Chrysler LLC’s car business evaporated in bankruptcy, may post a profit on its $106 million initial public offering of auto-parts maker Tower International Inc.
Tower, which was bought by Cerberus in July 2007 and builds hoods and doors for Volkswagen AG and Toyota Motor Corp., is selling 6.25 million shares at $15 to $17 each today, according to a Securities and Exchange Commission filing. The midpoint price would value the private equity firm’s $181.6 million stake at almost $200 million, the filing showed. The investment by New York-based Cerberus was part of a $1 billion deal that brought Tower out of bankruptcy just before the credit crisis began.
Any profit from Tower may provide consolation for Cerberus after the firm gave up its equity investment in Chrysler’s auto business and relinquished most of its stake in General Motors Corp.’s GMAC LLC finance unit as part of government bailouts of the auto industry. Tower, once the world’s largest maker of car and truck frames, is seeking to end at least five years of losses as global auto sales climb toward a record in 2010.
“The last two major deals were spectacular disasters, GMAC as well as Chrysler,” said Michael Yoshikami, who oversees about $1 billion at YCMNet Advisors in Walnut Creek, California. With Tower, “the goals are much more reasonable. Maybe this one will pay off,” he said.
Cerberus’s flagship private-equity fund, which had the largest investment in Chrysler and GMAC, gained 30 percent last year and has climbed 18 percent so far in 2010, according to a person familiar with the fund’s performance.
The buyout firm may recoup all its investment in Chrysler through its finance unit, which Cerberus retained full ownership of after giving up its stake in the automobile business, said the person, who declined to be identified because the information is private.
Cerberus, founded by former Drexel Burnham Lambert Inc. banker Stephen Feinberg in 1992, is taking Tower public three years after leading separate groups that invested almost $15 billion combined for controlling stakes in Auburn Hills, Michigan-based Chrysler and GMAC.
The buyout firm’s 51 percent holding in GMAC was diluted when the Detroit-based lender was bailed out by the U.S. and converted into a bank holding company.
Cerberus, Tower’s only shareholder, spent $14.57 per share for its 12.47 million-share holding, the filing showed. The buyout firm plans to retain its stake and offer 6.25 million new shares, which will give investors 33 percent of the maker of frames and chassis parts.
At that midpoint price of $16 each, Tower would have a market capitalization of about $300 million, debt of about $548 million and $141 million in cash, its filing showed.
The company’s enterprise value, or the sum of its stock and debt minus cash, would then equal $707 million, or 4.5 times its earnings before interest, taxes, depreciation and amortization of $157 million in the 12 months ended June 30, according to Tower’s filing and data compiled by Bloomberg.
That compares with the median of 5.7 times Ebitda for the 278 makers of original parts and equipment for cars and trucks, data compiled by Bloomberg show.
‘Hottest IPO Around’
“It’s not going to be the hottest IPO around, but I believe the deal will get done,” said Josef Schuster, the Chicago-based founder of IPOX Capital Management LLC, which oversees $3 billion.
John Dillard, a New York-based spokesman for Cerberus, declined to comment. Tower’s Frank Buscemi didn’t immediately respond to telephone calls seeking comment.
Tower’s initial sale is the second from the auto industry this year, following electric sports-car maker Tesla Motors Inc. in June. It also comes before a planned IPO from General Motors Co., 61 percent owned by the U.S. government after its own bankruptcy. GM will seek to raise $8 billion to $10 billion next month, less than the Detroit-based automaker had targeted, two people familiar with the matter said in September.
“These industries themselves have already been crushed, decimated, renegotiated a lot of their debt,” said Marc Pado, the San Francisco-based U.S. market strategist at Cantor Fitzgerald LP. “They’ve gone through the storm.”
Tower, which hasn’t reported an annual profit since Cerberus acquired the company, has lost a total of $108 million over that period, according to its filing. The auto-parts supplier still paid Cerberus $48.4 million in dividends.
Revenue at Tower may approach $2 billion in 2010, based on the $981 million it generated in the first six months of the year, a 41 percent increase from the first half of 2009, its filing showed.
Full-year sales may still be less than the $2.17 billion that Tower had in 2008, and fall short of the annual revenue that the company reported in each of the two years before it was taken over by Cerberus, according to the filing.
Cerberus’s IPO of Tower may benefit from a rebound in auto demand. Global sales may rise to an all-time high of 69.6 million this year, according to Nigel Griffiths, an economist for Lexington, Massachusetts-based IHS Automotive.
Sales in Europe accounted for 40 percent of Tower’s revenue last year, while 31 percent came from emerging markets such as China and South America, its filing showed. North American sales made up 29 percent of the company’s revenue.
Volkswagen, Europe’s biggest carmaker, was Tower’s largest customer, accounting for 17 percent of sales. Tower built the exterior components for the Wolfsburg, Germany-based automaker’s Touareg sport-utility vehicles. Tower also supplied the auto bodies for Camry sedans that Toyota City, Japan-based Toyota, the world’s largest automaker, built in North America.
“It’s a recovery story,” said Matt Therian, a Greenwich, Connecticut-based analyst at Renaissance Capital LLC, which has studied IPOs since 1991. “Investors are looking at this because it is a global player.”
Cerberus hired Goldman Sachs Group Inc., Citigroup Inc. and JPMorgan Chase & Co. in New York to lead Tower’s sale. The Livonia, Michigan-based company will trade on the New York Stock Exchange under the ticker TOWR.
Tower’s sale comes after U.S. initial offerings began to rebound last month, with eight of 10 IPOs posting gains, according to data compiled by Bloomberg.
Private Equity IPOs
While the IPO market has gained momentum, private equity- backed offerings this year have fallen 1.2 percent in the first month of trading in 2010 after averaging gains every year since at least 2001, data compiled by Bloomberg and Renaissance show.
Companies taken private by Cerberus also had some of the weakest finances, according to Moody’s Investors Service.
A total of 67 percent of companies acquired by Cerberus in leveraged buyouts before the credit crisis started defaulted or became distressed, a study last November by Moody’s showed.
That was the highest percentage among the biggest private equity firms, the credit rating company said. Of Cerberus’s six LBOs, Chrysler was one of two that defaulted. Two other investments were in distress, Moody’s said.
“Cerberus is very interested in some return on their investment,” said Rebecca Lindland, an analyst at IHS Automotive. For Tower, “being owned by Cerberus, that’s a company that really has been put through the wringer, when it comes to the automotive sector,” she said.
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