General Motors

  • 14 May 2007 at 10:34 AM
  • Chrysler

Daimler’s $650 Million Bar Tab

DaimlerChrysler_Verwaltungsbau_Moehringen.jpgThere’s a lot of talk today about the sale of Chrysler to Cerberus (and Lindsay Campbell’s appearance on the Sopranos, and how Warren Buffett hates animals). Larry Ribstein sees the transaction as a paradigm of the private equity deal (the hound of Hades is putting up $7.4 b “in return for which it is demanding cooperation,” so that it can “clean up contracting problems that are threatening to send an otherwise viable business down the tubes). Rupert Murdoch’s Wall Street Journal notes that Cerberus could effectively cut costs by consolidating Chrysler Financial and GMAC (of which it has a 51% stake). The Journal also adds that Stephen Feinberg, the head of the three-headed dog, is not only a Princeton grad, not only a champion tennis player, not only a paratrooper, but an avid deer hunter (which is important, because men who like to kill animals tend to know what they’re doing, and deer are vastly overpopulated in New Jersey). Finally, the J answers the question that’s been weighing on everyone’s mind, “Did Cerberus have a website last year?” A. No.
The Times quotes Hans-Richard Schmitz, representative of the German Association for the Protection of Shareholders, who weighed in with some not at all breaking news and the go-to metaphor for the deal: “This marriage made in heaven turned out to be a complete failure.” The Gray Lady also has some charts.
Rupert’s other publication, the Post goes where no one else dares go, and reminds everyone that “Sun-drenched billionaire Kirk Kerkorian was shut out of the process despite a late $4.5 billion bid for Chrysler.” (Our emphasis).
But it’s Deal Journal that actually tells us something interesting: by “sale of $7.4 billion,” Daimler actually means “it’s going to cost us $650 million” to get rid its red-headed step-child.

As the release itself explains:
Cerberus is contributing $5 billion into the new company (this does not go to Daimler). And another $1.05 billion goes into the financial business (this, again, does not go to Daimler.) Daimler gets $1.35 billion (but will loan the new company $400 million.)
So Daimler makes about $1 billion then, right? Actually, no.
Like a politician obliquely saying “mistakes were made,” Daimler goes on to say that the restructuring “will give rise to a cash outflow” of $1.6 billion.
In sum, the net outflow will be about $650 million, plus another $878 million of “prepayment compensation”, Daimler says. And that’s how a $7.4 billion windfall actually turns into a bill.

We also like this little exercise in decoding deal-speak because it affirms what Carney said a few months ago about how the only way anyone would take on Chrysler is if they were being paid to do so: “When we called one of our banker friends to ask for a valuation on what GM might pay for Chrysler, he joked that GM might ask Daimler to pay them to take it off their hands.”
A $7.4 Billion Windfall for Daimler. Not! [Deal Journal]
Chrysler going to the dog [Ideoblog]
Buyout Firm Close to Winning Chrysler Bidding [WSJ]
Chrysler Group to Be Sold for $7.4 Billion [NYT]

So General Motors is telling investors that you probably shouldn’t put much weight in its financial reporting. We would have thought that this might have been obvious from the fact that they just restated several years of financials. But just in case you were tempted to think they had solved all their accounting problems, GM wants to assure you that this is definitely not the case.
From the New York Times:

General Motors, a company once known as the model of corporate accounting, warned investors on Thursday that its performance was threatened by “ineffective” controls over financial reporting, including inadequately trained personnel and failure to obtain management’s approval for some transactions.
The disclosure, made in G.M.’s annual report filed with federal regulators after a six-week delay, was the latest indication that the automaker is on shakier footing than first thought.
It comes a day after G.M. restated five years of financial results and reported that it lost $2 billion in 2006 — a significant improvement over the previous year’s $10.4 billion loss but a sizable negative number nonetheless.

G.M. Says It Has Found Serious Flaws in Accounting[General Motors}

Are Russians Eyeing GM?

General Motors chief Rick Wagoner—has there ever been a more appropriately named auto-industry honcho—came out of the recent turmoil at the automaker looking stronger than ever. Not long ago it looked like he might be on his way out, as the company reported record losses and seemed, well, lost. But when the board of directors recently rejected the Kirk Kerkorian instigated proposal of an alliance with Renault and Nissan, with all three companies probably led by legendary turnaround artist Carlos Ghosn, it was clear that Wagoner at least had the confidence of his board and would be around a while.
Now he may be facing another challenge—this one from the crony capitalist land once called the Soviet Union. There have been conflicting reports about whether or not Russia’s Oleg Deripaska has bought a significant stake in the company. Over at Jalopnik, the motorheads try to figure out what’s really going on. Their big break comes when they hear from the source from one of Reuters’ sources who tells them, “”Who the hell knows, everything is possible.”
Glad that’s all cleared up then.
Watch Out, GM! The Russians Are Coming! The Russians Are Coming!

No Hostile Bid For GM From Ghosn

carlosghosn.jpgWe’re still not sure why anyone would want to own General Motors so we weren’t surprised to learn that Carlos Ghosn isn’t interesting in launching a hostile takeover of the automaker. The only question is why the shareholders of Renault or Nissan, the two companies currently run by Ghosn, would be interested in even a friendly takeover. Other than the general principle that Ghosn can fix any auto-company.

Mr. Ghosn said he would “never” pursue a hostile deal for control of GM. Any alliance with GM should preserve the separate identities of the partners, he said. “You don’t want to give the impression that this company is under the control of another company. That is what I want to avoid,” he said.

Ghosn Sees Benefits In Alliance With GM
[Wall Street Journal]