Article in May 15, 2007 Wall Street Journal

Cerberus Finds Luster in Detroit

In Chrysler Deal, Private-Equity Firm
Becomes Nation's Top Auto Lender;
'Growth Possibilities'?

By GREGORY ZUCKERMAN, SERENA NG and DANA CIMILLUCA
May 15, 2007

With its acquisition of Chrysler, Cerberus Capital Management isn't just becoming a force in Detroit. It's also becoming a force on Wall Street, with a stable of financial institutions that make it by far the biggest auto lender in the nation and a broader financial power around the globe.

As part of Cerberus's acquisition of an 80.1% stake in Chrysler Group from DaimlerChrysler AG, the private-equity firm will be getting the auto maker's lending arm, Chrysler Financial. Cerberus already owns 51% of GMAC Financial Services, the former financing arm of General Motors Corp., a stake it acquired last year.

With GMAC and Chrysler Finance under one roof, Cerberus will have approximately 11% market share in auto loans, nearly twice as large as its nearest competitor, Ford Motor Credit, and well ahead of U.S. banks, according to data from Experian Automotive. That could lead to cost savings and operating synergies, says Mark Oline, an analyst at Fitch Ratings.

Like GE Capital, the financing arm of General Electric Co., Cerberus has figured out that the financing business can be a rich vein even in struggling industries. Throughout the '90s, Cerberus quietly built up a middle-market lending portfolio at a time when many banks were abandoning these customers. Since then, Cerberus has spread its net over a far larger pool of borrowers both at home and abroad. In the process, it began picking off profitable niches globally.

Most recently, while many investors are writing off the auto-making business, Cerberus has tapped into a gold mine at both GM and Chrysler.

Car finance is "a very good business," says Efraim Levy, an auto analyst at Standard & Poor's Equity Research. "You take low-cost money and you lend it at a high rate. And then once you make a transaction and generate a fee from it, you can start the transaction over again and make another fee" by bundling car loans into securities sold to investors.

According to GMAC's annual report, its auto financing net income last year was $1.17 billion, or 7.8% of its total automotive financing revenue.

Private-equity firms have become increasingly aggressive buyers of other financial institutions in the past few years. One recent example: the deal to buy student-loan powerhouse Sallie Mae by JC Flowers & Co., another private-equity firm.

None have been more aggressive than Cerberus. Auto lending becomes the centerpiece of an even larger empire of financial assets that is quickly coming to rival some of the bigger financial institutions in the world.

The firm's interests range from Aegis Mortgage, a Houston mortgage company, to EntreCap, a Shelton, Conn., leasing company, to a collection of big banks in Japan, Austria and Israel. Success on some of these deals, such as the initial public offering last year of its Aozora Bank, gives Cerberus executives confidence it can make finance-lending deals work.

Chrysler Financial's book value -- its assets minus its liabilities -- is about $5.5 billion. That would make it a little more than a third the size of GMAC, which had a book value of $14.3 billion at the end of last year. When combined, that makes it a third of the size of GE Capital, before even accounting for Cerberus's many other financial holdings. GE Capital's book value is $54.1 billion.

Chrysler Financial is likely to fit into the broader ambitions of Cerberus. "We see numerous growth possibilities for Chrysler Financial, such as sectors like insurance and possibly consumer or commercial finance," says Mark Neporent, Cerberus's senior managing director and chief operating officer.

Cerberus is expected to keep GMAC and Chrysler Financial separate for the time being. It took the private-equity firm nine months to carve GMAC out of General Motors. If it was to put Chrysler Financial together with GMAC, it would have to find a way to separate the lending business from Chrysler's manufacturing business. Such separations are tricky because manufacturing and distribution and the financing of autos are generally intertwined.

Either way, GMAC could become a model for Chrysler Financial. GMAC, which deals in mortgage, consumer and commercial lending, does only about half of its business in car financing. Executives say Chrysler Financial will provide Cerberus with an attractive platform to pitch other kinds of loans or even insurance products.

GMAC's credit rating fell from investment grade to "junk" two years ago after GM was downgraded because of its mounting problems at the time. When Cerberus purchased a 51% stake in the finance company last year, it said it wanted to reduce GMAC's ties to GM's loss-making auto business and bring GMAC's rating back to investment grade.

That hasn't happened so far, in part because GMAC's mortgage-finance unit, Residential Capital Corp., recently posted large losses due to problems with its subprime home-lending business and a slower housing market.

Cerberus has also been better than many of its peers in lowering the risk of the deals it does. GM recently wrote GMAC a check for about $1 billion to compensate for Rescap's poor performance.

Cerberus recently replaced some of Rescap's top executives with individuals that have extensive mortgage-banking experience. Rescap's new CEO, Jim Jones, previously headed another Cerberus investment, Aegis Mortgage Corp., and also worked at Wells Fargo & Co. and Bank of America Corp.

Article in May 15, 2007 Wall Street Journal

Chrysler Deal Heralds
New Direction for Detroit

Cerberus Takes Gamble
On Union Concessions;
GM, Ford May Benefit

By GINA CHON, JASON SINGER and JEFFREY MCCRACKEN
May 15, 2007

By effectively agreeing to give away 80.1% of Chrysler Group to private-equity firm Cerberus Capital Management LP, German auto maker DaimlerChrysler AG has set the table for a potentially far-reaching restructuring of Detroit's faltering auto giants.

The New York investment firm and the German auto company have set an ambitious goal: to work with the powerful United Auto Workers union to restructure the $18 billion that Detroit's No. 3 auto maker estimates it will eventually owe for UAW retiree health-care benefits. Daimler, Chrysler's German parent, was unwilling to shoulder that burden.

Many big airlines and steelmakers have chosen to file for Chapter 11 bankruptcy protection to reduce such liabilities. If Cerberus can devise a formula for doing so outside of bankruptcy court, Ford Motor Co. and General Motors Corp. would almost certainly try to follow suit, potentially affecting some $95 billion in total retiree health-care obligations. Discussions among Big Three executives are under way at "the highest levels," one person familiar with the situation says.

Daimler's deal with Cerberus, announced yesterday, represents a watershed moment for both the U.S. auto industry and the burgeoning private-equity sector that is transforming global finance. Detroit's Big Three have been struggling for years to cope with fierce global competition and rising retiree and health-care costs. Private-equity firms like Cerberus, which often buy public companies and slash costs, have amassed large war chests of capital and have been aiming for bigger and bigger targets. With Chrysler, Cerberus is betting that it can run one of the nation's largest industrial companies more effectively as a private company.

"People say, how can you turn this around and we can't?" said Cerberus Chairman John Snow, former Treasury Secretary, in an interview. It will take patience, he said. "It might take a couple of years to really show the results. And public companies don't have two or three years."

Cerberus appears to be betting on several things: that the U.S. economy will remain strong enough that consumers will spend freely; that Chrysler's negotiations with unions will be fruitful; and that the company will produce vehicles that consumers want.

Investor excitement about the potential for private-equity investors to reshape Detroit was running high yesterday. Shares of Ford and GM surged in New York Stock Exchange trading. With stock-market valuations of $15.7 billion and $16.7 billion respectively, Ford and GM are potential targets for private-equity buyers, especially if their retiree health-care liabilities can be engineered to more manageable size.

Members of the Ford family, which controls 40% of Ford's shareholder voting power through a special Class B stock, met recently with investment bankers to discuss the future of their holdings. A lawyer for the family said yesterday the family isn't discussing the sale of any of its controlling stake. Last year, GM repelled an effort by Las Vegas billionaire Kirk Kerkorian to steer the company into an alliance with Nissan Motor Corp. and Renault SA. Although Mr. Kerkorian later sold his stake in GM, some analysts say GM could again become a target for private-equity investment.

For both Cerberus and Chrysler, the stakes are enormous, and the outcome is far from certain. The UAW represents about 50,000 of Chrysler's 80,000 workers, as well as many other workers in the industry. Several weeks ago, UAW President Ron Gettelfinger criticized private equity as companies that "strip and flip."

Last month, the UAW refused Cerberus's demands for wage and benefit cuts for new hires at parts supplier Delphi Corp. Mr. Gettelfinger called the situation "a mess." Cerberus is likely to pull out of an investor group that agreed to buy Delphi out of bankruptcy protection.

But yesterday, in the aftermath of a meeting Saturday in Germany with DaimlerChrysler Chief Executive Officer Dieter Zetsche, Mr. Gettelfinger struck a surprisingly conciliatory tone.

In an interview with Detroit radio station WJR -- a medium he often uses to get messages out to UAW members in Michigan -- Mr. Gettelfinger said that Mr. Zetsche and Chrysler CEO Tom LaSorda had told him Saturday that "the status quo for the Chrysler Group was no longer an option." In a news conference yesterday afternoon, Mr. Gettelfinger explained that until Saturday, his position had been to fight to keep Chrysler within DaimlerChrysler. He was told then that wasn't possible. He said several times that he had to work with "the hand I was dealt."

For Chrysler workers, the deal is likely to raise fears for further job cuts. In February, the auto maker said it would shed about 13,000 workers and idle a sport-utility-vehicle factory in Delaware, part of a plan to cut production capacity by 400,000 vehicles a year. Cerberus officials didn't disclose plans for further job cuts yesterday. Analysts expect Cerberus to consolidate Chrysler's consumer-finance business with GMAC Financial Services, a similar unit it previously purchased a controlling stake in from GM, which could result in job cuts. Chrysler's CEO, Mr. LaSorda, told employees there are no new job cuts planned in relation to the deal.

Benefits for active and retired union workers, however, are certain to be a big issue. Rising health-care costs have bedeviled Chrysler as its ranks of retirees have grown and health-care inflation has hovered around 10% in recent years. Cerberus is expected to pressure the UAW to make substantial concessions, which could raise the costs of prescription drugs and health-care premiums for about 84,000 UAW retirees and dependents.

Cerberus has a history of profiting by acquiring companies and assets others have left for dead. To finance its Chrysler bid, it plans to raise as much as $65 billion to refinance the auto maker's current debts, most of which rest with its financing arm. If it succeeds, it would be the largest-ever fund raising for a leveraged buyout, people familiar with the deal said.

Daimler's decision to sell Chrysler marks a dramatic retreat from a global-expansion drive begun in the late 1990s under former CEO Jürgen Schrempp. Mr. Schrempp's plan was to build on Daimler's base in luxury cars and heavy trucks by acquiring high-volume vehicle marketers in North America and Asia. In addition to engineering a $36 billion merger with Chrysler in 1998, it sought a controlling stake in Japan's Mitsubishi Motors Corp. and an alliance with Korea's Hyundai Motor Corp.

His bets went sour one by one. In 2004, Daimler unwound its investment in Mitsubishi after the Japanese company posted huge losses. Daimler sold its 10% stake in Hyundai the same year. Chrysler, meanwhile, stumbled into the red in 2000, requiring a costly restructuring.

Chrysler bounced back under Mr. Zetsche, thanks to hot models such as the Hemi V8 powered Chrysler 300C sedan and Ram pickups. But it posted huge losses again last year, in part due to rising gasoline prices and intensifying competition. The UAW's refusal to give it the same health-care concessions it had given to rivals GM and Ford, coupled with rising pressure from shareholders, sealed the decision to sell Chrysler.

"This decision is for us -- and above all for me personally -- not easy," Mr. Zetsche wrote in an email to employees. "It is, however, when viewed objectively, the only right one."

Cerberus beat three major competing bidders to snare the deal: the Blackstone Group LP and Centerbridge Capital Partners; Canadian auto-parts maker Magna International Ltd., and Mr. Kerkorian's Tracinda Corp.

The proposed Cerberus deal, which is expected to close in the third quarter, calls for Daimler to put up $650 million -- effectively paying to get rid of an asset it acquired in 1998 for $36 billion. But Daimler will be able to erase Chrysler's $18 billion in pension and health-care liabilities from its books.

Cerberus will make a capital contribution of $7.4 billion to the new Chrysler holding company, Chrysler Holding LLC. Of the total, $6.05 billion will be put into Chrysler -- $5 billion into the industrial operations and $1.05 billion into financial services -- and DaimlerChrysler will get $1.35 billion. But Daimler said it expects to pay out $1.6 billion to Chrysler before the deal closes to subsidize its negative cash flow. Daimler also will loan the new company $400 million. Upon shareholder approval, DaimlerChrysler will be renamed Daimler AG.

Mr. Zetsche said the elimination of liabilities and risks for Daimler weighed more heavily in the talks than price. The deal still has to be approved by Daimler's supervisory board, which is scheduled to meet Wednesday. "That had greater power and influence on the future balance sheet," Mr. Zetsche said.

For now, Cerberus has said it will work with Chrysler's existing management team, led by Mr. LaSorda. But Cerberus has on its payroll a team of former senior auto executives it can call upon for advice. They include former Chrysler Chief Operating Officer Wolfgang Bernhard, former Ford Vice Chairman David Thursfield, former Ford sales executive Robert Rewey and former Chrysler sales and marketing executive Gary Dilts.

Cerberus's chairman, Mr. Snow, said at a news conference at Daimler's headquarters in Stuttgart, Germany, that Chrysler would be better served outside the public glare of quarterly earnings statements and analyst commentary. "Our approach is fundamentally long term," he said.

Cerberus, named after the three-headed dog of Greek mythology that guards the gates to the underworld, was founded in 1992 by Stephen Feinberg, a former Drexel Burnham Lambert executive. Until recently, it was best known for buying distressed debt in the U.S., Japan, South Korea, Germany and elsewhere, then turning a profit by renegotiating or foreclosing on the loans. It also provided expensive financing to troubled companies.

In recent years, it has begun buying companies. It purchased a failed bank in Japan in 2000. It has been especially active in the auto industry. Last year, it bought 51% of GMAC from GM. It recently bought parts maker Tower Automotive in a $1 billion deal, and it owns seating-fabric maker Guilford Mills and Peguform Group, a German-based manufacturer of plastic parts.

To snare the Chrysler deal, Cerberus had teams of lawyers, bankers and accountants working at the New York and German offices of law firm Shearman & Sterling. Over the past two weeks, Daimler began focusing on the Cerberus offer over two others, according to two people involved in the transaction. Mr. Feinberg was deeply involved in negotiating sessions. "He was very direct, with no posturing or big ego," said one person involved on the Daimler side.

For Cerberus, the key to making the deal work will be the UAW. Chrysler has estimated internally that Japanese auto makers like Toyota Motor Corp. enjoy a labor-cost advantage of as much as $30 an hour, once all benefits and job-security provisions are taken into account. More than half of that gap is from benefits related to retirees, such as health care, pensions and group life insurance.

Chrysler estimates that without a fundamental change in its UAW contract, the gap will rise to $45 an hour by 2009 -- an average labor cost of $94.77 an hour for Chrysler, including benefits, versus an estimated $50.50 an hour at Toyota, Nissan and Honda, which have far fewer U.S. retirees and don't pay pensions.

Chrysler, GM and Ford hope to persuade the UAW this summer to agree to a potentially revolutionary retiree health-care plan similar to one reached at Goodyear Tire & Rubber Co., say three people familiar with auto maker plans. At Goodyear, the United Steelworkers union agreed to let Goodyear shift $1.2 billion in future health-care liabilities to a fund managed by the union. In return, Goodyear contributed $1 billion in cash and Goodyear stock to the fund, known as a voluntary employees beneficiary association, or VEBA. For Goodyear, the deal eliminated uncertainty over whether health-care costs would rise faster than projected, along with the possibility of a future face-off with the union over benefits.

The three auto makers, with about $95 billion in combined future union and current health-care liabilities on their corporate balance sheets, have been "in talks at the highest levels on doing something like the Goodyear deal," says one person familiar with the matter. A Goodyear-style deal, or a hybrid of it, would close "a little more than half" of the Big Three's labor-cost gap with Asian competitors, this person says.

GM is said to be pushing the hardest to create what is being called a "Big Three VEBA," which would set up a separate union-managed fund, which the auto makers would back with billions of dollars. J.P. Morgan Chase & Co. has estimated such a fund could be set up with $55 billion to $65 billion from the auto makers.

That would make the UAW one of the largest private-sector providers of health care in the U.S. Detroit's auto makers, which have roughly one million union retirees and dependents, are considering several different Goodyear-like models. They have to weigh the long-term financial viability of such a fund, and whether the UAW could sell such a deal to its members, say three people familiar with the Big Three's plans.

The auto makers have been making none-too-subtle comparisons to the steel industry, warning Mr. Gettelfinger and other UAW leaders that Detroit's auto makers could face Chapter 11 bankruptcy proceedings if they can't reduce their labor costs and close the gap with Toyota.

"This deal by Cerberus sets things up for very significant changes in Detroit," says Pete Pestillo, former CEO of auto-parts maker Visteon Corp., which was part of Ford, and the Ford executive in charge of UAW talks. "It will shake up GM and Ford as well." Cerberus, he says, doesn't "soldier on with bad contracts. They shine things up and sell. Ron had been against private equity, and I think he will find out firsthand now why he was against it."

Article in May 2, 2007 Detroit Free Press

BEHIND BING: Investors lined up for Watermark condo site

Backers are in athletics and business

May 2, 2007

BY JOHN GALLAGHER

FREE PRESS BUSINESS WRITER

Detroit business and civic leader Dave Bing has lined up an all-star roster of sports and business leaders to invest in Watermark Detroit, a $60-million luxury residential development planned for the city's east riverfront.

Those investors include Detroit Super Bowl Chairman Roger Penske, NBA veteran Derrick Coleman, Detroit Pistons President of Basketball Operations Joe Dumars, and DTE Energy Chairman and CEO Tony Earley Jr.

Other investors in Bing's project include Gregory Jackson, founder and president of Detroit-based Prestige Automotive Group, the largest group of African-American-owned dealerships in the country, and Tyrone Davenport, chief operating officer of the Dr. Charles H. Wright Museum of African American History. Bing is to introduce his investors and unveil new renderings of his project this evening at the Detroit Athletic Club.

Despite a weak real estate market and competition from other new housing projects, Bing said his Watermark would attract buyers based on its location just steps from the city's new RiverWalk, as well as its design and amenities.

"I feel very confident that with the product we're going to present, we'll be very competitive," he said Tuesday.

First announced last year, Bing's Watermark is one of three condominium projects planned for the city's east riverfront where cement silos stood for decades. The Watermark will feature 112 units in three formats including a nine-story building and a row of town houses.

Prices will range from the high $300,000s to more than $1 million, or about $300 per square foot. That price level, while historically high for Detroit, is in line with what other new downtown projects have been fetching, including condos at the Book-Cadillac Hotel and at a condo project near Bing's, the @water Lofts.

Bing is CEO of the Bing Group and president of Spingarn Development, the company that is building Watermark.

Any project launched today must deal with the weakest home-sales market since the early 1980s. Sales of existing houses have been slow for more than a year, and new home construction is running at only about 25% of normal levels.

Even so, waterfront property remains a draw.

"The view will be just magnificent," Bing said. "The east riverfront district is the hottest place in the state of Michigan."

Article in May 1, 2007 Detroit Free Press

Big plan for Troy complex cheered

Shopping, housing by 2010 described as boost for region

May 1, 2007

BY JOHN GALLAGHER

FREE PRESS BUSINESS WRITER

Defying a weak real estate market, developers unveiled plans Monday for the ambitious Pavilions of Troy, a $300-million project to rise on the site of the former Kmart Corp. headquarters.

Architectural renderings of the project -- the biggest new real estate proposal in many years in southeast Michigan -- depict a multipart retail and residential development clustered around a long central courtyard running north off Big Beaver Road.

In proposing a walkable, outdoor-oriented mix of shopping, offices, residences and entertainment, the developers are bidding to create a new downtown in the heart of suburbia.

The Pavilions, if built, would replace the empty Kmart headquarters on a 43-acre site in the heart of Oakland County's commercial district, at Big Beaver and Coolidge adjacent to the Somerset Collection mall.

Despite the harsh climate for real estate, political leaders expressed delight at the proposal.

"I think this is great news for Troy, great news for Oakland County, and for that matter great news for southeast Michigan," Oakland County Executive L. Brooks Patterson said at the unveiling of the plans.

The lead developer is Richardson Development Group of Reston, Va. BlackRock, a New York-based real estate investment company, will provide equity financing. Boorn Partners, an Ohio-based development firm with experience in mixed-use developments, is also a partner in the project.

The project needs the approval of the City of Troy, where many officials greeted the proposal with enthusiasm. Mayor Louise Schilling called it "the beginning of our renaissance in Troy."

Developer Hunter Richardson, who has worked on similar projects in Virginia and elsewhere, said developers would file their formal application with the city within a week. He hoped for approval by the end of this year, with construction to begin in 2008 and the first phase ready for opening in 2010.

Another example of New Urbanism

Borrowing from the principles of the design trend known as New Urbanism, most of the buildings in the Pavilions surrounding the central courtyard would rise two to about five stories, and would have retail shops on the first floor and residential units above.

These design principles -- sometimes summarized as "live-work-play" -- lay behind efforts to revitalize many older urban centers, including the downtowns of Detroit, Royal Oak and many other communities. But the Pavilions of Troy would be the first such new, stand-alone project, at least on this scale, to be built in southeast Michigan.

At the Pavilions, the central courtyard would be designed as a town square, in which entertainment such as a skating rink and concerts would cluster.

"What you want is as much activity within a 5-minute walking radius of the center of the project," Richardson said. "You want people living there, working there, in order to make it active even at times when it's not historically active."

Schilling said the project also fits with the principles of the Big Beaver corridor study, a vision that would transform Big Beaver from a traffic-dominated highway to a mixed-use urban center.

A boost for Big Beaver corridor

Other phases might follow if the first one succeeds, but the first would have all the major elements, including retail, residential, office and entertainment.

"It's a balancing act as to how you create these things," Richardson said. "It's got to feel complete so that there's never a gap in your experience."

He acknowledged that an outdoor-oriented development faces challenges in Michigan, which typically experiences three or four months a year of wintry weather. He said his team believed that high winds and rain were bigger problems than snow, and that his planners were taking that into account as they designed the Pavilions.

The project could rejuvenate the Big Beaver corridor, which in the past couple of years has experienced two big hits -- the departure of Kmart and the abandonment, at least for now, of the highly touted Monarch project, a proposed high-rise condominium development scrapped for lack of market demand.

Patterson said the Pavilions shows that Big Beaver remains important.

"I think Big Beaver will be Oakland County's main street, there's no question about that," he said. "Big Beaver will continue to be the main corridor for development in this city, and this city will continue to be the crown jewel in Oakland County as far as economic development."

Article in May 2, 2007 Detroit News

Ex-Piston Dave Bing's riverfront condos get 'blue-ribbon' investors' backing

Louis Aguilar / The Detroit News

Former Pistons star and Detroit business leader Dave Bing has lined up a team of heavy-hitting business and civic leaders to back his $60 million luxury residential development on Detroit's east riverfront.

The project -- The Watermark Detroit -- is one of three major condominium developments city boosters hope will transform the once-blighted riverfront into a centerpiece of downtown Detroit's fledgling revival.

Bing's roster of investors includes Pistons President Joe Dumars, Super Bowl Chairman Roger Penske, DTE Chairman Tony Earley Jr., NBA veteran Derrick Coleman, Prestige Automotive Group President Gregory Jackson and Tyrone Davenport, chief operating officer of the Dr. Charles H. Wright Museum of African-American History in Detroit.

Bing called the group "a blue-ribbon group of local investors" and will formally introduce them at a Wednesday night event at the Detroit Athletic Club.

Bing's plan calls for 112 residential units, including apartments, town homes and condos priced from $400,000 to $1.2 million. The project is located on a 2.2-acre site between Tri-Centennial Park's St. Aubin Marina and the Chene Park amphitheater that once housed cement silos.

In February 2006, Mayor Kwame Kilpatrick selected Bing and another team that includes Pittsburgh developer Charles Betters and ex-Pittsburgh Steeler Jerome Bettis to build two housing and retail projects as part of the Detroit riverfront revival.

Bing put himself on an accelerated timetable to get financing and got it done within a year. "We are proceeding along as planned, staying to the timetable," Bing said Tuesday.

On May 19, The Watermark Detroit begins its presale campaign, which means potential buyers can put down deposits.

"It's an honor to help revitalize the riverfront," Bing said. "The Watermark will offer amazing views of the Detroit River, which is the way a riverfront should be utilized."

Bing's project is further along than the Betters/Bettis project, known as Chene East, mainly because that team is concentrating on another residential/retail development on a 40-acre parcel near the MacArthur Bridge to Belle Isle, said officials from Detroit Economic Growth Corp. That project is called the Uniroyal site, after the factory once there.

The proposed Chene East project intends to offer an estimated 64 condominiums as well as restaurant and retail space.

Another riverfront project -- the @water, pronounced "Atwater" -- by developer Dwight Belyue began selling 225 units, including $1.5 million penthouses, in March. Deposits have been put down for 40 units, including two penthouses, Belyue said.