Issues & Opinions

Notwithstanding the cursory brush-off its expression of interest received from DaimlerChrysler, Kirk Kerkorian’s Tracinda remains active in its pursuit of the Chrysler portion of the automaker’s operations.

In an article in today’s WSJ, entitled “UAW Group, Tracinda Discuss Bids for Chrysler“, it’s reported that:

Representatives of billionaire investor Kirk Kerkorian’s Tracinda Corp., which has proposed a $4.5 billion acquisition of DaimlerChrysler AG’s Chrysler Group, met yesterday with United Auto Workers members who have separately proposed an employee-stock-ownership plan for Chrysler, according to people at the meeting.

The pitch? It seems a combination of several things.

First, the UAW, reasonably & predictably, wants to ensure as much control as possible over the source of its members’ employment and benefits. Previous recent deals, such as Sam Zell’s winning bid for the Tribune Co. have relied on employee stock ownership plans, and it’s refreshed the imaginations of those in the M&A game for an old tactic. Such deals don’t always end well, of course – witness UAL, and others, as explained by the WSJ’s Dennis Berman in the video below from several weeks ago:

Perhaps most important, he points out that ESOPs seem often to be used as a single solution to very different sets of problems, experienced by constituencies with very different goals. In the case of the Tribune, some of those problems and constituencies were [Chandler Family/dead money, lack of strategic control], [Stock market/yearning for growth], [Employees/editorial freedom, job security].

What are the problems and constituencies in the Chrysler situation? Quite similar, although substitute the parent company DaimlerChrysler for “Chandler family”, and substitute continued cushy employment terms for “editorial freedom”.

Note: ESOPs can come in several flavors, with varying implementations, one of which, like the Zell deal for Tribune, involves using an ESOP plan to fund the purchase with borrowed money and provides noteworthy tax advantage to the entity simply because the ESOP was the borrower. Tracinda’s approach appears not to rely on the tax advantages attendant to that form of an ESOP, instead relying simply on the benefits of shared ownership between capital and labor. That shared ownership, and the uneven results of it, are really at the heart of all following commentary about ESOPs.

Even given the historically muddy success record of ESOPs in these circumstances, the UAW is still pushing forward on that front, among several others. They appear to realize that the status quo can’t hold, but among the alternatives against which they’re fighting is the involvement of private equity. (WSJ)

The company’s unions generally oppose the involvement of private equity in the future of Chrysler, and UAW President Ron Gettelfinger, whose Detroit-based union represents the largest share of Chrysler hourly workers, plans to argue in favor of DaimlerChrysler hanging on to Chrysler and allowing its restructuring plan to continue. Still, Mr. Zetsche is facing pressure from shareholders who argue that Chrysler, with its $18 billion in unfunded health-care liabilities and its recent skid into operating losses, is a drag on the corporation’s profitable Mercedes-Benz luxury-car business.

Why the opposition to private equity, which, of course, Tracinda’s involvement would also represent? Simple – Tracinda, whatever else its reputation might include, isn’t seen to be the same as the other PE players in this game.

DaimlerChrysler and its bankers have focused on discussions with three potential buyers: Cerberus Capital Management LP, the team of Blackstone Partners and Centerbridge Capital Partners, and auto supplier Magna International Inc.

Tracinda, in its proposal to DaimlerChrysler, said it would consider giving the UAW a stake as part of a new capital structure. The proposal would give the union equity in return for giving up some future benefits. This idea, swapping the retirement health-care debts owed to UAW workers for equity in their employers, is getting increasing attention among Detroit leaders.

Cerberus & Blackstone each has a history of, well, doing what PE firms do – purchase, then restructure, repair, and re-float, generally over a 3-5 year period. Magna is a bit of a wild-card here, but can be lumped into the PE side of the ledger, as they’re partnering in the bid with Onex Corp, a fund with many portfolio companies, most of which are not household names. As an aside, Magna would seem clearly to want to ensure that one of its big customers (15% of sales) doesn’t bite the dust. Magna wants to keep the company intact, with all jobs and operations retained, and has made a bid of between $4.6 and $4.7 billion.

But Tracinda, with its $4.5 billion bid, can reasonably claim to have interest in a longer term investment, having made many such longer-term investments, including in Chrysler itself, in the past. It can also reasonably claim to have the ultimate financial success of the enterprise as its first priority, since it’s not trying to save a customer or to perpetuate its own employment. It also has available to it the services of Jerry York, former CFO of Chrysler, longtime auto-industry participant, and historically expert observer and fixer of corporate ills. Of course, its past investment in Chrysler created enough antagonism with management (at Daimler and Chrysler) that it’s started with a built in speed bump of indeterminate size, but the unions weren’t party to the past difficulties, and may still come down in favor of a Tracinda bid, for whatever that support may be worth.

Why might the UAW find Tracinda interesting, even if one of the guises under which it’s being considered is an ESOP, sketchy history and all? Because it might be the least scary of the lot, and because it’s easily possible to politic against the pure-play private equity options, enflaming emotions both here in the US and within the overly-union-influenced labor market of Germany, the parent company’s home market. Cooperation between the UAW and IG Metal, the union representing DaimlerChrysler workers in Germany, has been part of the defense strategy since the beginning of talks about selling Chrysler.

And the PE firms, plus largely non-unionized Magna, have worked hard to sell their proposals to the Unions. From the April 3, 2007 Detroit News (prior to Tracinda’s Apr 5 bid):

CAW President Basil “Buzz” Hargrove said Monday he has heard sales pitches from all three potential bidders — Canadian supplier Magna International Inc. and private-equity firms Blackstone Group and Cerberus Capital Management.

But Hargrove, like his counterparts in the American and German unions, remains concerned about the impact on workers of a Chrysler deal involving private-equity buyers.

“They were saying, ‘we are not as bad as some people say we are,’ ” Hargrove told The Detroit News.

“I don’t buy that.”

UAW President Ron Gettelfinger has criticized private-equity firms for “stripping and flipping” troubled companies such as Chrysler. Two labor members of DaimlerChrysler’s supervisory board have also spoken out against private-equity ownership.

As private equity continues its moves into larger chunks of the industrial infrastructure in the US and elsewhere, expect to see more creative finance, more politicking, and more attempts at union involvement in shaping the outcome.

Will such events slow down the currently-in-vogue move from public market to private equity financing? Quite possibly. Other potential inducements for such a slow down would include several of the current swath of private equity financed deals imploding from their own weight and poor structure, as well as a rethinking on the part of public company managers about how best to structure, and in some cases restructure, their existing businesses.

Will a large number of now-public firms be privately owned in the future, reducing the importance of public stock ownership itself? Not likely – one of the exit plans for PE owners is re-floatation. But the PE process has a goal – wealth creation through more intelligent management and deployment of capital. When the public markets can meet the same goal just as well, private equity loses its appeal.

But don’t hold your breath wating for that time to come.

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