Carving Up Carmakers?
It has become an all too familiar story: Executives fail to make tough decisions at a struggling corporate icon. Amid mounting financial woes, Wall Street numbers guys swoop in, gain control of the assets on the cheap, and embark on a painful -- yet highly profitable -- restructuring. That's how financier Wilbur L. Ross Jr. got the chance to reshape bankrupt steel producers, including giant Bethlehem Steel Corp. It's what private investor Edward S. Lampert hopes to achieve by redefining retailing after buying struggling Kmart Corp. (SHLD ) and Sears, Roebuck & Co. It's also why Edgar Bronfman Jr. and his private equity buddies are making over Warner Music Group.
So is there a finance whiz out there brave enough to try to do the same with General Motors Corp. (GM )? The question is no longer as crazy as it once might have seemed. Amazingly, if financial buyers wanted to buy the auto maker in its entirety, they could afford it: GM's stock price has slid 73% in recent years, reducing its market capitalization to just $15 billion. The stock market now values GM's finance businesses at more than the entire company. Meantime, private equity firms and hedge funds, with a combined war chest of some $250 billion to buy companies, are teaming up to take on targets in the $10 billion to $15 billion range. With a 25% premium common in mergers and acquisitions, that would make buying GM a stretch -- but, given its woes, maybe not for long.
THE HIGH COST OF REPAIRS
There's no question private equity players are starting to sniff around the troubled auto sector for deals. And with good reason. GM is shopping around its commercial mortgage business, Ford Motor Co. (F ) says it may unload its Hertz rental car unit, and DaimlerChrysler Corp. (DCX ) could put a power systems subsidiary on the block. Private equity firms already are snapping up suppliers. "Financial buyers are all over the auto parts business," says Barry Ridings, a managing director at Lazard.
Still, no one on Wall Street predicts a corporate raider will go after GM anytime soon -- in part because most think its decline is far from over. On Apr. 19, the carmaker reported a first-quarter loss of $1.1 billion and said it would no longer stand behind its earlier earnings projections for the year. Financial buyers, bankers, and analysts agree that the ultimate cost of buying all of GM remains prohibitively expensive. With its problems piling up, a buyer would trim the auto unit to a more profitable level. But that would mean spending tens of billions to close plants, pay out dealers, and invest in better cars. "It's like buying a house that needs a lot of work," says John A. Casesa, analyst at Merrill Lynch & Co. (MER ) "It's not the purchase price. It's all of the renovations."
That could change if GM eventually filed for Chapter 11. Ross picked up companies in steel, coal, and textiles in part because their bankrupt status enabled him to get rid of billions of dollars of pension and health-care commitments. Given GM's $38 billion cash stockpile, bankers say bankruptcy currently looks unlikely. Still, the auto maker is burning through its cash rapidly -- $3.5 billion in the first quarter alone. And it wasn't too long ago that a similar fate would have seemed unlikely for U.S. steelmakers.
Of course, in theory an aggressive buyer could separate out GM's profitable financing businesses and put the carmaker into bankruptcy. That would allow it to largely wipe the slate clean of $57 billion in unfunded health-care liabilities, bankers say. But pulling off such a move with labor would be a real high-wire act. Adds David Healy, automotive analyst at Burnham Securities Inc.: "You would kill the patient" by separating auto financing from manufacturing. In other words, without a captive finance unit offering incentives and cheap loans, GM's car and truck sales would be even worse than they are today -- at least until the auto maker came up with better models.
That's why private equity firms figure they're better off cherry-picking the lucrative units that GM and other struggling carmakers will have to shed to prop up weak earnings and deteriorating credit ratings. GM acknowledges it's in talks with "interested parties" to sell a majority stake in its commercial mortgage business. Kohlberg Kravis Roberts & Co. and Five Mile Capital Partners could invest as much as $2 billion in a stake, bankers say. KKR declined to comment, and Five Mile did not return calls. Next, bankers expect GM to shop its other mortgage and insurance units for roughly $6 billion combined. GM says it has no plans to sell them.
Meanwhile, DaimlerChrysler is considering selling its power systems and gas-turbine maker MTU Friedrichshafen for about $2 billion, bankers say. Daimler did not return calls seeking comment. Ford, which on Apr. 20 reported a 38% decline in first-quarter net income, to $1.21 billion, says it could sell its Hertz equipment and car rental business, which bankers say could fetch up to $8 billion. Ford also plans to sell a New York-based company called Beanstalk Group Inc., which handles licensing for such brands as Coca-Cola (KO ), Newell Rubbermaid (NWL ), and Harley-Davidson (HDI ).
Private money is pouring into auto parts suppliers. Investment firms announced a record $8 billion in global auto parts deals in 2004, more than four times the 2003 level, according to Thomson Financial (TOC ). Private investment firms think there's money to be made by shifting parts makers' efforts from selling to a shrinking GM to supplying its expanding Asian rivals and auto parts retailers. And many parts makers, struggling to cope with GM's demands for 20% in price cuts over the past three years, look like a steal. "Almost every week another auto parts company files for bankruptcy," says Ross, who has $2.5 billion at his disposal. He sees similarities between the steel and auto industries' problems, such as high fixed costs, stiff foreign competition, and crushing debt. But Ross adds: "It needs to get a little worse before we're going to do anything." Buckle up.
By Emily Thornton in New York, with David Welch and Kathleen Kerwin in Detroit, and Gail Edmondson in Frankfurt