The retreat of billionaire Kirk Kerkorian and Cerberus Capital Management LP from stakes in Ford Motor Co and Chrysler LLC may leave the US auto industry without new funding just as sales head to a 26-year low.
Kerkorian's Tracinda Corp said yesterday it may sell its stake in Ford and investor Stephen Feinberg's Cerberus is seeking to merge Chrysler with General Motors Corp or another automaker. The industry's recession started by $4-a-gallon gasoline and extended by the credit crunch following the bankruptcy of Lehman Brothers Holdings Inc. has battered investments in the US car companies.
“I don’t know where else they can turn right now, that's the problem,” said Thomas Stallkamp, a former Chrysler Corp president who is currently a partner at buyout firm Ripplewood Holdings LLC. “There is nowhere to turn until the credit market opens up, and even then the market will be nervous about automakers until the outlook for 2009 is clearer.”
The defection of Kerkorian and Feinberg's attempt to reduce his investment may speed consolidation among automakers as the freeze in the debt market means it will be harder for GM, Chrysler and Ford to raise additional cash by borrowing or through the sale of assets.
“Typical investors, and Cerberus is anything but typical, are running from the automotive industry,” said Warren Feder, partner at Carl Marks Advisory Group LLC in New York. “It's hard to see any upside with a degree of comfort, and you need that to make an equity investment.”
Pressure to Act: The pressure to find liquidity means “something will happen with Chrysler”, and it likely won't survive as an independent company, said Kimberly Rodriguez, principal of the consulting firm Grant Thornton LLP's automotive practice. Investors may have to act to support their own holdings, she said in an interview.
Chrysler is the third-largest US carmaker.
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Banks including JPMorgan Chase & Co. and Citigroup Inc, which are advising Auburn Hills, Michigan-based Chrysler, also hold some debt from Cerberus's purchase of the automaker from Germany’s DaimlerChrysler AG in August 2007. Those lenders may support a GM-Chrysler tie-up as a way of stabilising the companies and increasing the value of that debt, Rodriguez said.
“There's no question, regardless of your stomach for risk, that auto has taken it on the chin the last six months,” she said. “The biggest issue, from an investment standpoint, is that we're not at the bottom yet.”
Worst Stock: Detroit-based GM, the largest US automaker, is the worst performer in the Dow Jones Industrial Average in the past 12 months, losing 83 per cent of its value through yesterday. The automaker dropped 20 cents, or 3.1 per cent, to $6.34 at 10:40 am in New York Stock Exchange composite trading.
Dearborn, Michigan-based Ford, which dropped 74 per cent during the past year, fell 8 cents, or 3.7 per cent, to $2.09.
GM is trying to sell a medium-duty truck unit, a French factory and its Hummer brand to raise cash. Chrysler, which has paced the US industry so far this year with a 25 per cent sales decline, has a goal of selling more than $1 billion in assets this year, including its Dodge Viper sports car.
US auto deliveries may fall to an annual rate as low as 10 million vehicles this quarter and as low as 11 million next year, Himanshu Patel, an analyst at JPMorgan Chase & Co in New York, wrote in a report yesterday. His 2009 estimate would be the lowest rate since 1982. US sales were 16.1 million last year.
By the second quarter, GM may fall below the $12.5 billion cash reserve the automaker needs to pay its bills and will need asset sales, government loans, new debt or cash from a merger with Chrysler to get through the rest of the year.
Kerkorian's Loss: “The time horizon is extended for any potential turnaround” for automakers, said Pete Hastings, a fixed-income securities analyst at Morgan Keegan Inc. in Memphis, Tennessee. “I've been saying for months we are in a moderate recession. I'm not sure that everybody was on board with that view not too long ago.”
Kerkorian, based in Las Vegas, is unwinding his Ford stake after the value of his $995 million holding shrunk by two-thirds and put his firm's gambling investments at risk. Kerkorian also was concerned about departures of senior Ford executives such as Chief Financial Officer Don Leclair, the Detroit News reported today, citing a person close to Kerkorian.
Last week, Ford's collapsing stock price forced Kerkorian to pledge another 50 million shares of his MGM Mirage casino company to back the $600 million credit line used to buy into the second-largest US automaker.
Merger Talks: “It's fair to say that a large investor in Ford that not too long ago was making positive statements about their turnaround prospects has decided to put their money elsewhere is not a good sign,” said Bob Schulz, credit analyst with Standard & Poor's Ratings Service in New York.
Cerberus's discussions with GM are focused on combining auto production with Chrysler, and a transaction may not include Chrysler Financial, according to two people familiar with the matter, who asked not to be identified because the talks are private. The New York-based firm would keep Chrysler Financial and GMAC LLC, the people said.
Cerberus is also talking to automakers including Renault SA and Nissan Motor Co, the people said. Nissan, Japan's third-largest automaker, may take a 20 per cent stake in Chrysler to bring the company into the Renault-Nissan alliance, the Detroit News reported today, citing people familiar with the talks. Renault is France's second-biggest automaker.
Not Interested: Fixing automakers has proved too difficult for many private-equity investors, said Randal Stephenson, a senior managing director with Pali Capital in New York. Private-equity firms are more likely to eye distressed debt in the current markets and large deals aren't possible given that credit is difficult to come by, he said.
“In the new world order, it's not going to be enough to do the private-equity investment of old,” said Stephenson, who oversees the firm's mergers and acquisitions group. “You can't do financial engineering on automakers because they are so messed up.”
GM has posted $69.8 billion in losses since its last annual profit, in 2004. Ford has lost $23.9 billion since 2005.