Global Insight Perspective | |
Significance | Cerberus is reeling from the severe downturn in the automotive market, which is badly affecting its recently acquired concerns, Chrysler and GMAC. |
Implications | The distressed nature of both concerns is forcing Cerberus to seek a sale, merger, or both as quickly as possible, while GM's motivations in the affair are far less clear. |
Outlook | Desperate times call for desperate measures, and although a merger makes no sense from a long-term perspective, recent events have prompted a short-term scramble to survive by any means possible. |
It has been reported that Cerberus Capital Management is accelerating talks with potential buyers/partners General Motors (GM) and Renault over a possible break-up/merger of Chrysler LLC. The move comes as the private equity concern closes in on securing the remainder of Chrysler from former partner Daimler, according to an AFX report. Any potential sale or merger will hinge on this factor, as Daimler, which currently owns 19.9% of Chrysler, has no interest in participating in a merger between Chrysler and another automaker, the report states.
However, a Reuters report quotes a Renault spokesperson as denying the rumours that the French company is involved in the talks, stating that it is "not in discussions with Cerberus about Chrysler, Jeep", adding that the "company [is] focusing on dealing with [the] current car market situation". Nevertheless, the facts remain unclear.
What is known is that both Cerberus and the banks backing Chrysler and GM via various loans and credit lines are keen to see a deal done. J.P. Morgan Chase & Company is the largest holder of Chrysler debt, and also a large lender to GM, but is keen to reduce its exposure to the auto industry, according to reports. GM is preparing to announce disastrous third-quarter results as the sales slump in the U.S. market hits the manufacturer hard.
However, numerous hurdles remain, including a less-than-enthusiastic response to the idea from some members of GM's executive board. In addition, one of the key elements—the swapping of GM's remaining 49% stake in GMAC, in which Cerberus already owns the other 51%, for Chrysler—remains unclear.
The motivation behind GM's support for a merger is also unclear, although it is thought that the promise of access to Chrysler's reported US$11 billion in cash is one of the key attractions. Reports have also stated that GM sees up to US$10 billion in potential cost savings from a merger, as well as access to Chrysler's volume-selling minivan lines and potential in the Jeep brand.
Cerberus is looking to retain a stake in a combined GM-Chrysler company, according to a Wall Street Journal (WSJ) report, and lenders such as J.P. Morgan have shown interest in equity in such an arrangement, despite several other banks having passed on the deal. J.P. Morgan is joined by Citigroup in representing Chrysler and Cerberus's concerns, while Morgan Stanley and Evercore Partners are representing GM, according to the WSJ.
Outlook and Implications
Very few concrete facts are known at this point, quite naturally, as negotiations are in the early stages and the complexity of the talks means that they remain in a very fluid state. However, what is becoming clear is that Cerberus Capital Management and its various backers for its automotive-sector acquisitions of recent years are becoming highly concerned over their positions. Cerberus bought 51% of GMAC two years ago for US$14 billion, only to find that its main profit generator of recent years, the residential mortgage-lending arm ResCap, was heavily exposed in the sub-prime fiasco, and it has subsequently closed all ResCap's offices and laid off most of the staff. A year later the company bought 80.1% of Chrysler, which has subsequently seen its sales fall 25.1% in the year until September, or some 400,000 units. With loans and credit lines associated to these purchases up for renewal, the current state of the companies is dictating the need for swift and decisive action. Yesterday, it became clear that GMAC is in a distressed state as it is being locked out of international sources of funding at rates and risks that support GM's auto lending, which has led GM to incentivise dealers to use other finance companies to fund vehicle purchases in a bid to stem its losses (see United States: 16 October 2008: GM to Promote Dealer Financing Options to Consumers as GMAC Faces Crisis).
GM's motivation for taking on the ailing Chrysler remains unclear, struggling as it is with its own sales losses and given that it would lead to a largely duplicate range of models and brands. From an operational, product, and production standpoint, there is no rhyme or reason to the merger. However, if GM can swap the struggling GMAC for Chrysler and still gain access to the latter's alleged cash pile, then the motivation becomes clearer. GM could offload the struggling GMAC, take on the struggling Chrysler, but access enough cash to ride out the storm over the next year or 18 months. That said, it would be a desperate move and would necessitate drastic action to cut costs at Chrysler, which itself must be burning through its cash at a rate similar to GM. From Cerberus's perspective, it could combine Chrysler's financial arm with GMAC (although what the debt markets would make of the resultant company is anyone's guess) and retain a stake in the resultant GM-Chrysler concern, although this appears a tenuous deal at best. That said, it is looking increasingly unlikely that Chrysler can continue in its current form as a going concern for much longer, and if the tumultuous events of the last few weeks have proved one thing, it is that anything is possible, even if it often defies conventional logic.