April 16, 2008

Carlos dreams big as the Chrysler-Nissan deal moves toward its inevitable conclusion.

By Peter M. De Lorenzo

Detroit. Well, it looks like Carlos Ghosn is finally going to get his way. Long interested in having an official link with one of the U.S. automakers – and after being rebuffed by GM in pursuit of a much larger deal – Ghosn instead has found a willing partner in the Cerberus-owned Chrysler LLC. Cerberus, which has seen the initial euphoria of the Chrysler deal turn sour in a big hurry, is rapidly running out of options – financial and otherwise - and running out of time. The combination of a faltering U.S. economy, tightening credit, and the fact that they went into the Chrysler deal with insufficient funding has crippled the capital management company’s quest to turn Chrysler into an entity of appreciating value.

The result?

Emerging from the rumors and the backroom discussions is the news that Nissan will begin assembling a Japanese-built small car for Chrysler in 2010 and that Chrysler LLC will build a pickup for Nissan in Mexico. This should come as no surprise because the hints have been out there for some time now, even if some observers refused to accept the writing on the wall.

But as significant as the event of the now-public and formal linkage of Chrysler and Nissan is, the more significant news happened last week, when several hundred million dollars of loans to Chrysler had to be sold off by one of its underwriters at a deep discount ($.61 on the dollar), according to Reuters.

When the original $7.4 billion deal to take Chrysler private took place - with Daimler AG selling Chrysler to Cerberus Capital Management - it was partially funded by a $7 billion term loan that was handled by Bear Stearns, Citi, Goldman Sachs, J.P Morgan and Morgan Stanley.

But with Cerberus running into serious headwinds in trying to get anything going with Chrysler – not to mention the horrendous state of the U.S. auto market - and the nation’s banks running into a tsunami of financial bad news, banks are now scrambling to get out from under the Chrysler debt.

The discount sale price on the Chrysler paper does not bode well for Cerberus’ chances to resurrect Chrysler’s fortunes in the U.S. market. With first quarter sales down 14 percent from the year before and a product portfolio that’s still too far removed from where the market is heading, there’s a growing feeling within the industry that there’s just not enough time left for Chrysler to realize any substantive gains before Cerberus has to cry “uncle.”

And despite the public pronouncements that have Chrysler and Nissan executives falling all over themselves insisting that there’s nothing more to this deal other than what has been announced, it’s clear that formal talks on a larger agreement in scope will be taking place in the not very distant future (if they haven’t begun already).

The bottom line in this deal is that Cerberus - for all of its savvy and gold-plated reputation – has run up against an industry it was ill-equipped to tackle in the first place at the exact worse moment in history to attempt to do so. Even with a strong U.S. auto industry firing on all cylinders – a scenario that hasn’t been seen since the heyday of the SUV frenzy – Cerberus would have been hard pressed to rejuvenate Chrysler.

Carlos Ghosn ultimately will present Cerberus with a golden opportunity to extricate itself from an agreement it never should have entered into to begin with. He will maximize the Chrysler facilities (at least the ones he deems worth saving), he will pump up the Jeep brand globally by putting real muscle behind it, he will weed out the Chrysler product lineup both current and future (not that it would take a genius to figure that out), and he will approach the U.S. market with a unified product strategy that he has so desperately wanted.

In short, Ghosn will get what he has always wanted, which is to become more than a second-tier player in the U.S. market.

As for Cerberus? They will fold their tent quietly, with the nasty realization that the “end game” money promised to all of the high-priced talent they’ve recruited won’t even approach a quarter of the original estimates - if that. Not to mention the fact that the company’s reputation will take a very serious hit because of their misguided auto industry “adventure.”

Will it all go the way Carlos dreams it will go? We’ll have to wait and see.

But that’s why they play the game.

Thanks for listening, see you next Wednesday.