Cerberus Sinks the Ship

5/14/07

Full disclosure: I am long January ’08 DCX 80 puts and am looking to buy more puts.

So Cerberus is going to buy 80.1% of Chrysler for $7.4 billion. Obviously, I have some opinions on this:

• Clearly, the Cerberus people are smarter than this lone scribe toiling away in obscurity in suburban Chicago. They are certainly more knowledgeable about Chrysler, if only by having access to information that I don’t. All that having been said, I wouldn’t come near this deal with a barge pole. As I have said before on numerous occasions, given its sorry sales, banal (I’m probably being generous in my use of adjectives here.) product line and gargantuan (as high as $19 billion) PORB liabilities, Chrysler is worthless as it stands. Piling on the debt necessary to buy the company will surely sink it, and relatively quickly. It is very telling that the potential bidders in the best position to evaluate Chrysler’s value, Magna and Tracinda, took a pass on the Pentastar at anything like Cerberus’s bid price.
• Most of the talk about Chrysler’s problems this morning has centered on its PORB liabilities and getting concessions from the UAW on this point. As I have said on numerous occasions in the past, Cerberus, and virtually everyone else in Detroit, is focusing on the wrong problem. The major problem facing the Big 3 is not their PORB liabilities, but the JOBS bank which, by making labor a fixed cost, leads to overproduction and decimates the resale value of even the best of the Big 3’s products. Note that, while health care adds about $1,800 to the cost of a Big 3 car, the average incentive on a Chrysler Group vehicle was $3,994 in April. Incentives on Dodge vehicles averaged a whopping $5,000 per copy. Bringing these incentives down to the industry average of $2,342 would go a long way toward covering PORB liabilities. Solving the JOBS bank problems thus gives the new Chrysler owners, and all of the Big 3, a way out of their current morass without screwing the workers, or at least not screwing them as badly as current talk would indicate.
  Cleary, neither Cerberus nor the people who run Ford and GM are unaware of the importance of the JOBS bank, but the emphasis has clearly been misplaced on the PORB liabilities.
• Why am I still so negative on DCX? Wouldn’t one think that getting $7.4 billion for a worthless asset would be a big positive? Of course, but, as I said in my April 3 comment on this topic:
  o 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.
  o Even if none of the prior three points prove valid, there is always the old “buy on rumor, sell on fact” rule.
  Further, bear in mind that DCX will still own 19.9% of the doomed new Chrysler.
• How would I like to play this deal, other than by buying DCX puts? I would like to be part of the group that buys Chrysler assets when they are sold out of the bankruptcy that will result from the Cerberus deal. While these aren’t great assets, but they will be sold cheap, and without the accompanying PORB liabilities.
  
  The Pontificator