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It is not hard to find gloom and doom in Detroit, what with U.S. auto sales likely, according to CSM Worldwide research, to hit their lowest levels in nearly a decade this year. Still Jack Butler, co-practice leader for the restructuring department at Skadden, Arps, Slate, Meagher & Flom LLP, remains an optimist. Butler has spent the better part of the last two years dealing with the auto parts sector as lead counsel on the Chapter 11 restructuring of Delphi Corp. Butler, speaking at an automotive industry restructuring finance summit in Dearborn, Mich., Wednesday, said his work with Delphi has helped him “appreciate the major transformation going on in this business.” Dealmaking, according to Butler, is driving that change, and private equity is taking an increasingly large role in pushing deals. Private equity has been burned by automotive companies in the past, specifically a late 1990s period when parts makers were consolidating for the sake of scale in response to carmaker demand to work with fewer, bigger suppliers. Many of those deals resulted in overleveraged companies that are now either in Chapter 11 or are struggling to avoid a filing.
Stephen Girsky, a long-time Morgan Stanley auto analyst who is now president of Centerbridge Partners LP affiliate Centerbridge Industrial Partners LLC, said that the focus now is more on building companies that, while not quite so broad, have strong market share and deep knowledge of a particular market segment. Girsky, whose Centerbridge has a deal in place to invest $750 million in a reorganized Dana Corp., said that successful companies need to model themselves after healthy firms such as Johnson Controls Inc. “The good companies are ones that stick to their knitting,” Girsky said. “They are focused, and they reinvest in what they are good at, which helps them to build their market share.” Entrenched unions have caused some investors to shy away from the sector. However, Martin Sumner, vice president of Carlyle Group, said his firm has found labor is receptive to buyers who offer clear ideas and who do what they promise. Carlyle in June along with Onex Corp. struck a $5.57 billion deal to buy Allison Transmission from General Motors Corp. “The important thing is that we do what we tell them we are going to do,” Sumner said. “We have a frank conversation about what is needed, and what our plan is.” Jim Gillette, director of supplier analysis at CSM Worldwide, said he believes private equity has helped improve corporate governance in the industry, bringing in new leaders with new perspective and who are less indebted to stakeholders such as unions and local community leaders that have made it difficult to make the tough decisions in the past. But he warned that private equity can do damage as well if the wrong targets are selected. There are some companies that simply should not find a savior. “Infusion of capital into a poor candidate for survival can prolong the existence of excess capacity,” Gillette said. —Lou Whiteman See TheDeal.com story on Delphi's restructuring Tags: Chrysler, Ford, General Motors, corporate restructuring, automobiles Categories Deal Video
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