December 21, 2007

Chrysler in serious financial crunch: report | Reuters

Chrysler in serious financial crunch: report | Reuters

Is this a sign of things to come for most leveraged buyouts? My guess is yes.

the slowing economy and you have a Private equity firms have taken so many companies private over the last few years and loaded them with debt. However the debt used in buyout was never intended for business operations but to buy out shareholders and pay transaction fees for private equity firms. Add to the less flexible balance sheets of LBOs subprime implosion in corporate America similar to the one going on in housing.

Debt taken on by LBO companies are packaged in another three letter acronym entities, they are called collateralized loan Obligations (CLO) rather than the more infamous housing relation Collateralized Debt Obligations (CDO). SIVs and banks were left holding the bag with the housing mess, will they be holding another surprize for us with corporate subprime?


John said...

Is there a contrarians’ value opportunity in the works here?

A court has now let Cyberus out of the United Rental’s deal.

Cerberus are smart analysts (like you) and were willing to pay $34.50 a share (yes it was the top))))

So at the current $17.91 plus the new $100M they will get for the break up fee is not United Rentals a perfect play for the long term value players like us?

Sami said...

You got a valid point and that is iteresting idea. but no knowing enough about United rental I can't answer this.

Private Equity outfits like Cyberus usually target mismanaged companies that have steady cash flows. So they see that united is mismanaged but mismanaged companies do not stay miss managed for ever.

Do you know enough about United to venture an opinion?

John said...

I really do not know anything about the business

My theory was that the analysts really though they could make a go at that takeover price so at the 17$ level we have lots of room for an up side.

$100 m is really a lot of money relative to the company’s financials so it is also worth a bit

The price today jumped 4% so others may have the same contrarian view as me

Just thinking that from the ashes of the mess that the undone deals will leave could be some real bottom fishing bargains

Then again, I hope BCE is not a post deal 25$ given the positions I have taken))))

Sami said...

I looked at it quickly, United rental is equipment rental business so it has to invest money in idle assets until someone rents them to earn money. I generally do not like these businesses. I guess if I calculated their ROIC it will be low. If you look at their ROA which is close proxy to ROIC it is meager 5.09%. I bet their cost of capital would be higher so they can be destroying value. And these businesses would be killed in a recession because no one will be renting from them. so for that reason I am out, ala Dragon Den, if you watch that show.

As for BCE I can't wait for them to finish it as I have a position in the preferred rather than the equity. I choose preferred rather common because it presented for a no risk investment.

When BCE was in talks about a LBO their preferreds and debt tanked while shares went higher. I bought some preferred as the deal was too good to pass. Preferred went down from 25 a share to 20-21 range when I bought them. I though at that time three scenarios will transpire, all were positive return:

1. no buyout and preferred will go back to their trading range prior to the talks
2. a buyout and the acquirer will keep preferred outstanding in that case I will be earning a nice return compared to any thing out there
3. the acquirer would buy them back, which in fact what will happen

I love when the market give me stuff like that, does not happen often but great when it does.