The purchase of Chrysler by Cerebus Capital Management from Daimler-Benz has been postponed. The deal was scheduled to close this week. But the softness in the equity market caused by the failure of certain mortgage derivative firms is making it difficult to raise all of the money required to fund the buy-out deal.
 
All parties, including Cerebus, Daimler-Chrysler, and the investment banks involved, issued assurances that the deal was still going to happen.
 
But, the fact is that there is a $12 billion dollar problem which the investment bankers have yet to solve.
 
That’s how much they’ve fallen short in placing the long-term debt needed to fund the deal.
 
Deals of this sort involve raising money through short-term loans which are then to be replaced by long term debt, usually in the form of bonds. The investment banks that handle the financing often are the source of the short term loans, frequently tapping other banks for funds, as well. 
 
In this instance, $20 billion is required for the purchase itself, exclusive of additional borrowing which is to be funneled into Chrysler Financial, the finance arm of the company. The investment banks raised the $20 billion, but they’ve only been able to place $8 billion of that amount with purchasers of long-term debt.
 
That means that the investment banks might have been obliged to carry the balance of $12 billion.
 
As reported here previously, Cerebus had already been forced to increase the interest rate offered on the debt offerings, making the buy-out more expensive than originally contemplated.
 
But even that hasn’t worked.
 
Though the parties all expressed confidence that the deal would still close, there is reason for doubt.
 
General Motors recently made a deal to sell it’s Allison Transmission unit for $3.1 billion. That deal has been postponed and is being restructured after equity groups Carlysle and Onyx ran into trouble raising the necessary funds.
 
Both the amounts and the risks involved in the Allison deal are less than those involved in the Chrysler buy-out.
Though the parties are blaming the delay on the fall-out from the subprime mortgage market, there may be more to it. To many, the possible increase in federal fuel economy standards mandated for automakers is a pill Chrysler is ill-equipped to swallow. Moreover, the more that the interest costs for the loans rise, the less that is available to finance the new product development which is essential to Chrysler’s success in the marketplace. 
 
When Daimler-Benz made its deal with Cerebus, it essentially sold the company for nothing, in exchange for the buyer’s assumption of the company’s debts, including its pension and retiree obligations. Clearly, Daimler concluded that investing its resources in the Mercedes-Benz division was a better use of its capital than putting more money into Chrysler. (Indeed, Daimler reported today that its second quarter profit at Mercedes almost doubled over the same period a year earlier.)
 
The market seems to be concurring with Daimler’s assessment.
 
This may be bad news for Chrysler and, if the deal falls through, for Daimler.
 
But it is also bad news for Ford.
 
Ford has been shopping Land Rover and Jaguar and is reported to have Volvo on the block, as well. For Volvo, Ford is said to want $8 billion.
 
That money may be hard to come by. Volvo makes a profit, of course, so a better case can be made with investors to fund its purchase than for a company that’s losing money, such as Chrysler. But Jaguar hasn’t made money in years, and the implications of the Cerebus problem on any purchase of that unit are certainly not good. 
 
No matter how all of this shakes out, it is fair to say that the debt required to purchase the various car companies up for sale is going to cost much more than the sellers had hoped. At best, they won’t get the price the wanted. It will be necessary to lower the price to diminish the cost of the debt required for the purchase.
 
Everyone in the Chrysler deal is claiming it’s going to go through.
 
But don’t bet on it going through at the current price.
 
At this point, Daimler can’t afford to let this deal fall through. It is unlikely that, were the deal to be cancelled, it could get another buyer at any price. It must shed Chrysler to make its own financial results look good, because the in-built liabilities of Chrysler will be a perpetual drag on the parent company’s earnings if Daimler ends up stuck with the unit.
 
That means that Cerebus is the only show in town at this point.
 
How long do you think it’s going to take the people at Cerebus to figure that out?

What do you think?
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