GM's bid (?) for Chrysler

3/31/07

FULL DISCLOSURE: I AM SHORT DCX AND LONG PUTS ON DCX.

FURTHER FULL DISCLOSURE: I HAVE BEEN SO FOR THE LAST TWENTY POINTS OF UPSIDE ON THE COMPANY, SO TAKE WHAT I SAY CUM GRANO SALIS.

I knew I shouldn’t have started writing about cars and the car business on the blog!

GM made a “throw-away” bid for Chrysler weeks ago, offering Daimler 10% of its outstanding stock for Chrysler. The General also asked for a $1 billion cash payment from Daimler to help defray the health care costs it would be assuming by buying Chrysler.

Let’s look at this bid. GM’s market cap is $17.3 billion. 10% of that is, in round numbers, $1.7 b. So GM’s net bid for Chrysler was…$700 million.

Meanwhile, the talk on the Street is that Cerberus or Centerbridge/Blackstone will bid $6b to $7b for Chrysler. Talk is that Magna, possibly along with Ripplewood, will bid less than $5b for Chrysler.

In my last comment on cars, I said that it didn’t surprise me that Magna, which is in a better position to evaluate Chrysler than is any private equity firm, would probably be bidding less than the private equity firms. I also stated that I have a hard time believing that Chrysler is worth anything, laying out some of my reasons, which centered mainly around a combination of an insipid (perhaps too laudatory a word in this case) product line with few signs of revitalization combined the usual gargantuan Detroit PORB liabilities.

My point is reinforced by GM’s, which clearly is in a better position to evaluate its cross-town rival than are the financial Harry Potters of the private equity world, or even than Magna, bidding relative pocket change for Chrysler. Yes, this was a throwaway bid. Yes, Chrysler is worth less, perhaps far less, to GM than it would be to a private equity firm eager to build a vertically integrated car industry colossus, or even to Magna. But the spread from $700m to $5-$7 billion is very telling.


The Pontificator