IHS Global Insight Perspective | |
Significance | U.S. automotive supplier Delphi officially emerged from Chapter 11 bankruptcy protection yesterday after two private equity firms agreed to forgive US$3.5 billion in bankruptcy financing loans in exchange for ownership of the company. |
Implications | General Motors will also still be involved, pumping nearly US$1.75 billion in investment into Delphi, forgiving US$2 billion in claims on the company, assuming US$1 billion in obligations, and taking over several plants and businesses. |
Outlook | Delphi can now finally get on with the business of restoring its sales, but the new company is much smaller, leaner, and has many fewer products than the outgoing firm. |
Automotive parts and systems supplier Delphi has finally emerged from bankruptcy after four long years of being under court insolvency protection, according to several news outlets. "We are grateful for the support and loyalty of our customers, who have placed their trust in Delphi's ability to provide world-class products and uninterrupted supply, and the support of our suppliers who have contributed broadly to our efforts", said Delphi Chief Executive Officer (CEO) Rodney O'Neal, as quoted by the Detroit Free Press. O'Neal will stay on as the company's chief executive in the post-bankruptcy period. Delphi finally exited bankruptcy after a pair of equity firms won an auction process to acquire the bankrupt supplier in exchange for forgiving about US$3.5 billion in bankruptcy financing debt. Those two private equity firms, Elliott Management and Silver Point Capital, lent Delphi money to operate in bankruptcy. They will primarily own Delphi's foreign manufacturing operations. A previous attempt at exiting bankruptcy in April of 2008 fell through at the last moment when a US$2.5-billion deal from a consortium of investors led by Appaloosa Capital Management collapsed. Delphi then became a victim of the credit crunch and recession, languishing in bankruptcy until pressure from the U.S. government forced a final resolution.
General Motors (GM) will continue to play a major part in Delphi as well. In addition to the US$12.5 billion that the automaker has spent on Delphi in the past four years of bankruptcy, GM will now take ownership of the supplier's global steering business and its five remaining U.S. plants. In return, GM will assume over US$1 billion in Delphi obligations and waive US$2 billion in claims on the supplier. In addition, GM will pump another US$1.75 billion into Delphi and provide it with low-interest loans as needed. Throughout its bankruptcy, Delphi has remained the single largest supplier of components to GM, making it especially important to the automaker. "We’re pleased to see a final resolution to the bankruptcy and wish the newly emerged Delphi success", said GM CEO Fritz Henderson. "The closing transactions allow Delphi to effectively serve its customers by focusing on its core business. The agreements also enable GM to access essential components and steering technologies."
Outlook and Implications
The newly emergent Delphi is a very different company to the one that went into bankruptcy four years ago. The statistics on the new company compared with the old are indeed sobering: when it entered bankruptcy in 2005, the company was achieving US$23.4 billion in sales revenues; this shrank to just US$18 billion last year and is expected to drop to just US$10 billion in the post-bankruptcy period. From being a catch-all conglomeration of myriad GM component suppliers, Delphi has shrunk to being a purveyor of overseas-made climate control systems, powertrain systems, and automotive electronics. Over 50,600 people worked for Delphi in the United States when it filed for bankruptcy in 2005, but because of plant closures and buyouts it now employs only about 14,000 personnel. The company had 44 plants in the United States when it entered bankruptcy; it possesses only four now, and one of those is earmarked for closure. This dramatic shrinkage has not changed Delphi's status as one of the most critical suppliers to GM, but the automaker has taken back in-house a number of the more critical systems that it has with Delphi.
Going forward, Delphi's task is not going to be much easier. It now faces the challenge of rebuilding its business post-bankruptcy with a much smaller portfolio of core products that it can develop and promote. A key challenge will be to diversify the company's customer base so that it does not have to rely so much on GM for a big chunk of its business and can spread out its risk across multiple suppliers. Visteon, Delphi's counterpart that was spun off from Ford in 2000, has done an admirable job of diversifying its customer base, with Hyundai now accounting for nearly as much of its business as Ford. Critical to any supplier's fortunes is integration into Asia, and here Delphi should have some success, being tied to GM as it is. Its time in bankruptcy has been a long and difficult period for Delphi, but if the economy does begin to turn around in the fourth quarter of 2009 and first quarter of 2010, the rising tide of auto production should help in Delphi's recovery.