Pardus Joins Appaloosa In Delphi Investment Plan -Sources

June 14, 2007: 12:21 AM EST

DETROIT -(Dow Jones)- Hedge fund Pardus Capital Management, which has recently launched efforts to become a potential lead investor in Delphi Corp.'s (DPHIQ) Chapter 11 exit, has joined what had been a rival team of investors led by hedge fund Appaloosa Management, people familiar with the matter said Wednesday.

Earlier in the day, a separate hedge fund - Highland Capital - filed a disclosure with the Securities and Exchange Commission saying it was dealing directly with Delphi and General Motors Corp. (GM), the auto supplier's former parent and largest customer. Highland had been working with Pardus, but the pair have gone separate ways, these people say.

The breakup between Pardus and Highland draws clear battle lines among deep- pocketed investors for stakes in a re-organized Delphi, which filed for bankruptcy in October of 2005. At stake is an opportunity to hold a significant portion of equity and control of Delphi, which hopes to emerge from bankruptcy this year with a lower cost base and more attractive product line than it had two years ago.

Until recently, it appeared a team led by Appaloosa was the clear-cut winner in the race to control Delphi. However, private-equity giant Cerberus Capital Management - a huge source of funding for the Appaloosa team - dropped out of the $3.4 billion bid abruptly earlier this year and turned its full attention to a successful drive to acquire DaimlerChrysler AG's (DCX) Chrysler Group. Cerberus's exit left Appaloosa and partner Harbinger Capital looking for a new partner, opening the door for Pardus.

Delphi's effort to find equity backers is a critical step in realizing its bankruptcy-emergence plans. The auto supplier, which is cooperating with former parent GM on several key issues, is also negotiating a wage and benefit package with its unions.

Even as Appaloosa fortifies its bid with the addition of Pardus, which holds a large chunk of Delphi shares, sources say that Highland could be capable of mounting a considerable challenge for various reasons.

In its Wednesday filing, Highland said it has been granted meetings with GM and Delphi leaders, representing a significant launching pad for its rival bid. A GM official said the auto maker expects Highland to likely present a concrete investment plan soon and the auto maker is interested to see of Highland could indeed be a suitable Delphi backer.

In addition, Highland's ideas for an equity plan are seen as being fairer to some significant current Delphi shareholders, sources say. Current Delphi shares could be wiped out when the company emerges from bankruptcy, and Highland and Appaloosa are at odds over how the new equity should be distributed among stakeholders.

Highland may find a partner in Brandes Investment Partners, which is a top Delphi shareholder that does not appear to be on board the Appaloosa plan.

One person said that while Highland's offer may be more optimal for shareholders, "this is a far more complex situation with a lot more constituencies."

A GM spokeswoman declined to comment on the matter, and Delphi officials could not immediately be reached late Wednesday.

Texas-based Highland, which owns a 7.8% stake in Delphi, first signaled interest in the parts supplier last December by launching a rival $4.7 billion investment plan to the Appaloosa-Cerberus-Harbinger deal. Highland's plan, however, was largely ignored by Delphi, and the investment firm was told to go back and try to get more support among other Delphi investors. In April, Highland reiterated its interest in participating in a Delphi investment plan.

Highland in the past has estimated Delphi's earnings would skyrocket after it emerges from bankruptcy, thanks to lower costs and other factors.

Delphi, which lost nearly $5.5 billion in 2006, said recently that its monthly net loss was $66 million in April. Pardus has experience in the automotive sector with major stakes in Visteon Corp. (VC) and French supplier Valeo SA ( VLEEY).

The firms that back the Delphi deal promise to take home large fees and would profit if their investment stake in what likely will be a publicly held company were to increase as Delphi's financial performance improves.

But a condition of the original $3.4 billion investment agreement is reaching a consensual labor agreement with Delphi's unions, the largest of which is the United Auto Workers.

People familiar with the labor talks say the sides are edging closer to an agreement.

GM is expected to supplement wages for its former employees working for Delphi, and the parties are trying to agree on how many Delphi-UAW jobs GM will guarantee by committing to buying products from certain Delphi plants in the United States.