Bankruptcy Becomes Delphi

It has attracted two bidders with starkly different approaches

Need more evidence that private investment firms are on the prowl for risky buyouts? Consider the swirl of activity surrounding bankrupt Delphi Corp. Despite problems that would scare off even the most courageous investor in ordinary times--high labor costs, a contentious union, billions in retiree obligations, and a heavy reliance on ever-shrinking General Motors Corp. (GM ), to name a few--the auto parts maker has attracted bids from two groups of private investors, one as high as $4.7 billion.

A multibillion-dollar bidding war over a bankrupt company is unusual enough. But one of the offers also includes a provision that would give current Delphi shareholders a major voice in the reorganized company. "Shareholder control in Chapter 11 cases is very rare," says William J. Rochelle III, a bankruptcy attorney with Fullbright & Jaworski in New York. "We're exploring the outer limits of the solar system with this."

Delphi isn't your typical company in bankruptcy. In about 96% of bankruptcy cases, companies' share prices are at or near zero. Shareholders usually dump their stock because bondholders and lenders have stronger claims on the remaining assets. But Delphi fetches nearly $4 a share, having soared in the past year; its $2.1 billion in shareholder equity can't be ignored. There's another wild card at Delphi: The United Auto Workers has the power to effectively scuttle any deal it finds unsatisfactory. All of that makes the bankruptcy judge's decision tricky. Delphi declined to comment.

The battle for Delphi heated up on Dec. 18 when Chatham (N.J.)-based hedge fund Appaloosa Management, the company's biggest shareholder, proposed to invest $3.4 billion and reorganize the company. Four days later, Dallas-based investment firm Highland Capital, the second-biggest shareholder, bid $4.7 billion.

Appaloosa seems to be in the driver's seat. Along with partners Cerberus Capital Management, Harbinger Capital Partners, and a few others, it already has agreed with Delphi management and the company's former parent, GM, to inject cash and restructure ownership. The investment hinges on a deal that sticks GM with billions in union retiree benefits. (GM has subsidized buyouts for 20,000 Delphi workers, will rehire up to 5,000 workers, and will assume up to $7.5 billion in retiree obligations.) The proposal would give 5% of Delphi's stock to GM and more to unsecured creditors, all of which would come from the hides of shareholders. Appaloosa and Cerberus would appoint 6 of the 12 board seats and own 30% to 72% of Delphi. Appaloosa declined to comment.

By contrast, Highland's deal would give any shareholder the chance to keep his or her full stake in the new company, an unusual result in a bankruptcy resolution. And only 2 of the 12 board seats would come from management, the rest being independent. "Once we saw [Appaloosa's] proposal, we knew we couldn't live with it," says Patrick H. Daugherty, a senior partner at Highland.

Highland's offer seems a no-brainer for any judge charged with finding the best resolution for all involved parties. It's richer, with better provisions for shareholders. "It's difficult for a judge to say no to the person whose money is on the table," says law professor Lynn M. LoPucki of the University of California at Los Angeles School of Law.

But Highland faces an uphill battle. Appaloosa boss David Tepper has spent months working with GM and Delphi on the proposal. He has also forged a relationship with the UAW, visiting the union's Detroit headquarters several times. Highland has no such relationship. And the UAW, which is negotiating a new labor deal with Delphi, might balk at any buyout if its leaders don't like a potential owner. In fact, to appease the UAW, which has a contentious relationship with Delphi's chairman and CEO, turnaround specialist Robert S. "Steve" Miller, Appaloosa insisted that Miller step down at the completion of the bankruptcy.

So why did Highland bother at all? Even if the bid fails, the firm might succeed in other ways. Its presence could force Appaloosa and its partners to sweeten their proposal or to make the deal more shareholder-friendly, either of which would benefit Highland with its current 7.9% stake in Delphi. That wouldn't be a bad result for taking a flier on a bankrupt company.

Corrections and Clarifications "Bankruptcy becomes Delphi" (News & Insights, Jan. 15) should have noted that Highland Capital Management's offer to buy Delphi Corp. (DPHIQ ) out of bankruptcy includes a provision that all current shareholders can maintain their stakes in the reorganized company.

By David Welch

    Before it's here, it's on the Bloomberg Terminal.