Investors Bet On Auto Indus

The U.S. auto industry has been struggling under the weight of massive pension and health-care obligations, and just a few months ago, there was talk of bankruptcy-court filings.

But yesterday, some on Wall Street were betting on a U-turn for the car makers. The reason for their optimism: Cerberus Capital Management LP's deal to buy 80.1% of DaimlerChrysler AG's Chrysler Group for $7.4 billion.

Investors bid up shares of Ford Motor Co. and General Motors Corp., betting Cerberus might wrest concessions from the United Auto Workers, which endorsed the Cerberus-Chrysler transaction. And that, these investors believe, could finally reduce the labor costs for all of Detroit's Big Three.

'Having a big firm full of smart people putting billions of dollars of investment in Chrysler is a vote of confidence in the North America auto business,' said Robert Barry, an auto analyst at Goldman Sachs Group Inc. Goldman has provided investment-banking services to Ford and GM in the past 12 months and owns at least 1% in GM shares. He has what is equivalent to a 'hold' rating on Ford and GM.

But some industry analysts aren't buying the story. Even if Cerberus succeeds in restructuring its labor contract for Chrysler, and rivals Ford and GM follow suit, their long-term survival still is a long shot, they said.

'This is a bar at 2 a.m. on St. Patrick's Day,' said Peter Morici, a professor at the University of Maryland's Robert H. Smith School of Business, who doesn't own shares in any of the auto makers. 'Everyone's around debating how much longer they can stay before the bar eventually closes.'

GM and Ford have been restructuring their U.S. operations on and off for nearly 20 years, as their unionized businesses have steadily lost market share to lower-cost, nonunion Asian and European auto makers. Health-care benefits, which the companies are bound to pay under their contracts with the UAW, adds roughly $1,500 a car to the cost of their vehicles -- a cost penalty they can't offset by raising prices because of competitive pressures.

The UAW's endorsement of the Cerberus-Chrysler deal has ignited hopes that the private-equity firm, which specializes in buying and turning around distressed auto companies, will be able to negotiate a shareholder-friendly contract with the union. Cerberus also bought 51% of GMAC from former parent GM last year, which could be bolstered by Chrysler Finance.

Stoking their hopes is the agreement in January between Goodyear Tire & Rubber Co. and its largest union, the United Steelworkers. Under that deal, Goodyear agreed to transfer its $1.2 billion health-care liability to a fund managed by the Steelworkers union. Goodyear, in turn, would put $1 billion in cash and stock into the fund.

Both GM, which has an estimated $55 billion in future and current health-care liabilities, and Ford, which has some $22 billion in such union obligations, have been studying the Goodyear agreement, among other options.

'We read this to mean that Cerberus has received reasonable line-of-sight visibility from the UAW on the scope of possible concessions,' Himanshu Patel, an auto analyst at J.P. Morgan Chase & Co., wrote in a research note yesterday. He has the equivalent of a 'sell' recommendation on Ford's shares and a 'hold' on GM's. J.P. Morgan has provided investment-banking services to Ford and GM in the past 12 months.

GM's shares yesterday rose 3.9%, or $1.16, to $30.62 in 4 p.m. composite trading on the New York Stock Exchange, down 0.3% this year. Ford saw its shares climb 4.1%, or 34 cents, to $8.71, also on the Big Board; its shares are up 16% this year. DaimlerChrysler shares gained 2.6%, or $2.12, to $84.12 on the Big Board. Daimler's shares are up 37% this year. Some auto-parts suppliers, which have been attracting interest from private-equity firms and other investors lately, also saw their shares rise.

The U.S. auto makers haven't been stellar investments for investors. GM and Ford, both saddled with speculative, or 'junk,' credit ratings, have long been struggling with negative cash flow and huge earnings losses, which won't begin to go away as long as the companies have to fund health-care liabilities for union workers. Worse, they can't compete with lower-cost, higher-quality Asian auto makers without big injections of capital to finance production improvements.

Ford narrowed its quarterly net loss to $282 million in the first three months on revenue of $43 billion, compared with a net loss of $1.4 billion in the year-earlier period, but it still is strapped for cash. Its return on invested capital, assets and equity all are in negative territory, and analysts can't value the company on a price-to-earnings basis.

GM, which has recently made some improvements in its profitability, is trading at about nine times its estimated 2007 per-share earnings, according to Thomson Financial. By comparison, the Standard & Poor's 500-stock index is trading at 16 times estimated 2007 earnings.

Goldman's Mr. Barry said the deal results in Cerberus buying the auto business for little more than the value of Chrysler's retiree health-care liability. 'In that sense, it's not exactly a ringing endorsement,' he said.

The auto makers still would need to overhaul their supply chains and invest in new-product development, even if they restructured the union contracts in their favor. And that isn't necessarily in the cards.


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