Friday, October 17, 2008

Financing may be holding up deal

Cerberus could put up the cash to make it work


Chrysler Chief Executive Bob Nardelli, right, and Vice Chair Tom LaSorda have noted that the automaker is attractive to foreign companies, too.


Chrysler owner Cerberus Capital Management and General Motors Corp. are working as hard as they can to get a deal to merge the two automakers, but financing is the issue keeping them apart, a person familiar with the talks told the Free Press.

But the private equity firm is “willing to put in cash to any deal that makes sense,” another source said.

A merger is seen as Cerberus’ preferred solution for Chrysler, where U.S. sales have dropped 25% so far this year, the people said. But financing a deal such as this can be complicated and could involve money flowing either way. When Cerberus acquired majority control of Chrysler from Daimler last year, the $7.4-billion deal included then-DaimlerChrysler spending money to get rid of its U.S. unit.

Because neither Cerberus nor GM is making public statements about the talks, it’s hard to definitively say how things are going. What is clear is that a number of scenarios -- including a laundry list of automakers and possible equity stakes -- are floating around Detroit about the future of the auto industry and Chrysler in particular.

GM hopes to have a deal by the end of the month, the Wall Street Journal reported Thursday.

It noted that J.P. Morgan Chase, a key lender to both automakers, favors a deal. Citing people briefed on the talks, the paper said a deal is far from settled.

The turmoil in the U.S. auto industry could have historic ramifications. Industry sales in the United States are down almost 13%; GM’s sales are down nearly 18%.

Chrysler’s supposed kitty of cash could be useful for GM.

GM, which lost $18.8 billion in the first half of the year and has been burning through at least $1 billion a month, is believed to have enough cash to make it through the rest of 2008, but several analysts worry the company will not have enough for 2009.

Barclays Capital analyst Brian Johnson, in a note to investors, said GM is about $2 billion short of what it needs to make it through 2009 -- even with help from the government and drawing down an additional $3.5 billion on its credit line.

As a privately owned company, Chrysler’s finances are less clear, but all signs point to trouble. The automaker has seen the biggest sales decline in Detroit, and it has indicated that its automotive and financial arm lost $509 million in the first quarter of the year. It has said it had $11.7 billion in cash on hand at the end of June, and that it had earned $1.1 billion before interest, taxes, depreciation, amortization and before restructuring charges during the first half of 2008.

Chrysler had identified $1 billion in noncore assets to be sold to raise money and has said about half of that has occurred.

“People have been talking about the $11 billion that Chrysler supposedly had at the end of June. I think Chrysler needs that money just to maintain its operations as well,” said Aaron Bragman, an analyst with Global Insight. “If that cash is going to be used by GM to further its own operations, that means they’re going to shut down Chrysler.”

There could be other partners for Chrysler, perhaps Renault-Nissan. An executive with Renault reportedly said earlier this month that the automaker might be interested in Chrysler.

Chrysler and Nissan already have an agreement to build some specific vehicles for each other. Similarly, Chrysler is building minivans for Volkswagen.

“For a foreign automaker, there is value in Chrysler in its domestic capacity, in its domestic brands and dealership network,” Bragman said.

Some see Italian automaker Fiat as a dark horse candidate to acquire Chrysler, noting it has the means and motivation to make such a deal work.

In August, Tom LaSorda, a Chrysler president and vice chairman, confirmed that the Auburn Hills automaker had talked with Fiat, but he declined to say over what. “At this stage, there are no formal discussions going on,” he said back then.

Chrysler Chief Executive Officer Bob Nardelli has also said a Chinese automaker might be interested in buying Chrysler. “It depends on who has a hoard of cash in this economy because they’re not going to get a lot of debt out there,” Nardelli told the Automotive News.

1 comment:

Anonymous said...

Sounds like if Cerberus gives GM Chrysler & enough cash. Cerberus would be out of the auto industry; and GM would basically have enough to "Garage Sale" themselves long enough to survive.
Chrysler LLC has enough of thier own reserves to continue through the world economy issues and go on to thrive; there is no reason for it to go under just for the sake of saving GM. Perhaps GM needs to see what they're doing wrong that's making them go under so fast.