More on a bid for Chrysler

4/3/07

FULL DISCLOSURE: I AM LONG JANUARY ’08 DCX 80 PUTS

Some readers have responded to my comments regarding DCX’s being a great short with what on the surface looks like a great, if rhetorical, question, which goes something like this (I can’t quote from memory):

If you are right and Chrysler is worth very little or nothing, wouldn’t it be a big positive for DCX if they got $4-$6 billion, or more, for Chrysler?
(Note: Yesterday (4/2), German newspaper Welt am Sonntag, reported that one of the bids could reach an astounding $9 billion.)


My reply is multi-faceted:

1. Sure, being able to sell Chrysler for a huge premium over its minuscule real value would be a big plus for DCX if DCX could get such a premium. While I don’t think the hedge fund managers preparing Chrysler bids are as smart (or at least not as knowledgeable about the car business) as they and their cheerleaders in the financial press seem to think, they are not stupid, either. The lower bids coming in from bidders far better positioned to evaluate Chrysler (i.e., GM and Magna) have to be giving these guys pause. Even if a huge bid should come in, due diligence and final negotiations would take months, plenty of time for buyers to, er, reevaluate their bids once other formerly interested parties have drifted away and moved on to other opportunities to, as Ron Gettelfinger would put it, strip and flip.
2. Some of the proposed deals reportedly are structured such that DCX will retain a piece of Chrysler, partly in order to insure further cooperation and parts and technology sharing between Chrysler and Mercedes. So DCX may not rid itself entirely of Chrysler problems by means of a deal for its US arm.
3. Even if Chrysler is sold, the DCX investor will be left with Mercedes. When did Mercedes become such a prize? Remember, as recently as 2005, Mercedes was the sick partner, losing $660 million, which had to be carried by Chrysler, which was making $2 billion. Though is has improved somewhat on this score, Mercedes is still plagued by quality problems. The luxury car market is very crowded. The car market itself will be very tough in the upcoming year as the economy slows and as the typical car buyer’s (including the luxury car buyer’s) piggy bank is drained; i.e., the value of his or her home, and the ability to borrow against it, declines.
4. Even if none of the prior three points prove valid, there is always the old “buy on rumor, sell on fact” rule.
   

So DCX remains a great short. As I said before, however, if one could short the Chrysler buyer, if there is one, that would be an even better short. Given the range of buyers, though, Magna is the only potential buyer that could be shorted, and I suspect Magna won’t pay up for Chrysler.

The Pontificator