Blog: Dave LeggettPrivate equity hits heavy weather

Dave Leggett | 31 July 2007

Is the private equity bubble that has underscored takeover mania about to burst? There were signs last week that the investors who underwrite the mountain of debt that funds leveraged buy-outs are a lot less keen than they were. And if private equity firms catch a cold then stock markets do too, such has been the role of private capital in mergers and acquisitions activity that has underpinned stock prices growth.

Private equity firm Cerberus’ purchase of Chrysler has already hit some heavy weather. All sides maintain that financing for the deal will be forthcoming, but bankers have been forced to postpone a large syndicated loan that would underwrite the deal. Now is not the time to be looking for that sort of financing and investors may be concluding that automotive firms carry higher risk than most.

The private equity firms expressing an interest in Jaguar and Land Rover might find raising the finance tricky. Indeed, Cerberus may feel that it doesn’t really need any additional car company exposure now that Chrysler is proving hard for debt markets to swallow.

What of Volvo Car? Ford’s surprise profit announcement last week may not have changed all that much. Ford may still feel it needs as much money as it can get for its PAG assets – including Volvo, the valuable bit - in order to focus on getting the core business into shape and reduce the need for debt wherever possible.

Ford and GM are both performing very well outside of the US. It’s at home where the big structural problems lie. And they are serious. The need for downsizing is a part of it (and there has been good progress on that), but there’s also another big part that needs to be sorted out: legacy liabilities, especially healthcare. It has to be handled correctly and the stakes are high.

A deal with UAW may be worked out on the basis of setting up a trust fund, which would get the legacy liabilities off the companies' books – a deal concluded at Goodyear shows how it could work. But it will require finance from the companies. If that can’t be squeezed from existing internal sources, stalled debt markets could make life difficult, even if a deal is worked out with the UAW.

FEATURE: ‘Barbarians at the gate’ enter the auto industry


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