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Auto Bailout

Chrysler's Looming Tag Sale

Chrysler-made vehicles are delivered to a lot in Los Angeles on Apr. 2. Mark Ralston/AFP/Getty Images

It's looking more and more like there's a bankruptcy filing in Chrysler's future—maybe as soon as next week.

White House officials, Chrysler executives, and the banks holding the struggling automaker's debt all point to a strong likelihood that Chrysler will fail to win the concessions needed from debt holders and auto worker unions by Apr. 30 to merit additional loans from the U.S. Treasury. On Wednesday, Apr. 22, Michael Robinet, head of global forecasting for CSM Worldwide, said he placed a "95% likelihood" on a Chrysler bankruptcy filing.

Behind that hard arithmetic is a calculation by the banks that they would do better selling Chrysler's assets in bankruptcy court than by taking a $1.5 billion deal being offered by Chrysler owner Cerberus Capital Management and Treasury, say officials close to the negotiations who spoke on background. The banks are led by Citigroup (C), Goldman Sachs (GS), JPMorgan Chase (JPM), and Morgan Stanley (MS), with some smaller banks and hedge funds involved as well.

Asset-by-Asset Valuation

There has been some movement in negotiations. On Thursday the Treasury's auto task force proposed that banks holding $6.9 billion of Chrysler's secured debt—collateralized by hard assets such as factories, real estate, and brands such as Jeep—accept $1.5 billion and 5% equity in the company, according to sources familiar with the negotiations. But that's a long way from the $4.5 billion and 40% equity that bankers and private equity firms have been demanding.

Political pressure is being applied to the banks by the White House as well as by officials such as Michigan Governor Jennifer Granholm and members of Congress. They express outrage that banks that took taxpayer money from the Troubled Asset Relief Program would take such a hard-line position, which would jeopardize the U.S. auto industry and hundreds of supplier companies if Chrysler and/or General Motors (GM) go bankrupt.

So far, the banks are dug in. But it wouldn't be easy to find buyers for Chrysler's dented assets if a sale were forced in the current economic climate. Here's an asset-by-asset valuation of what a broken-up Chrysler might be worth.

Jeep, the Best of the Lot

By most accounts, Chrysler's Jeep brand is its most valuable asset. Jeeps, after all, are world renowned for their off-road ruggedness. But they're also gas-thirsty SUVs. Any company taking on Jeep is going to have a hard time meeting tougher fuel-economy and C02 emissions standards in the U.S. and Europe. Last year, Jeep sales in the U.S., the brand's biggest market by far, dropped 30% from the year before, to 334,000. (Globally, Jeep sold 497,000 vehicles.) Buy Jeep, and you get a sprawling, costly, unionized manufacturing complex in Toledo, Ohio. And customers have gotten used to seeing sales incentives on Jeeps as high as $10,000.

The most likely buyers of Jeep would be Chinese automakers or Indian SUV/pickup maker Mahindra & Mahindra, which is planning to enter the U.S. next year with its own brand in more than 200 dealerships. "There is value there, but making a profitable business model internationally in this environment is going to be tough for a lot of automakers," says Gary Dilts, senior vice-president for global auto operations at J.D. Power & Associates (a unit of The McGraw-Hill Companies (MHP), as is BusinessWeek).

Meanwhile, Chinese automakers have taken a hard look at all the up-for-grabs U.S. auto brands—Hummer, Volvo, Saturn, even Chrysler when Daimler-Benz was shopping it to buyers in 2007. They haven't yet bought any.

It's hard to go by recent transactions in finding a value for Jeep. Ford sold Jaguar and Land Rover to Indian automaker Tata Motors in March 2008 for $2.3 billion. But that was before the meltdowns of Wall Street and the credit market. More recently, GM has been trying to sell Hummer—for which it paid more than $1 billion in 1999—with experts estimating it will get about $150 million.

In a good market, Jeep might fetch $4 billion, said one executive who works with auto companies on valuations and asked not to be identified because he is involved in other transactions. "But this is a total buyer's market, and there are very few buyers, so a market price is very hard to set."

Anyone Want a Minivan?

Chrysler has long dominated the minivan market with Dodge Caravan and Chrysler Town & Country—heck, the company basically invented them in the 1980s. It still holds 39% of the market. But minivans have been on a long slide: Only 592,000 were sold by all companies in the U.S. market last year, down from a peak of 1.37 million in 2000. Chrysler has had to offer huge incentives to maintain its hold on the market, discounting the vehicles by $10,000 and more. Over half of Chrysler's 124,000 Dodge Caravan sales last year were to rental and commercial fleets; most of that is not profitable. Nevertheless, Toyota and Honda keep increasing their share.

Families have increasingly been choosing SUVs and crossovers (SUVs built on passenger-car platforms instead of those of pickup trucks). Ford and GM have exited the minivan business. Hyundai is pulling out. And Nissan may leave as well. Volkswagen last fall launched the Routan minivan, which Chrysler builds for the German automaker by adapting its Chrysler Town & Country and allowing VW to slap its brand on it. VW has built more than 22,000 but has sold fewer than 5,600 so far. It will likely exit the business when its agreement with Chrysler expires.

A buyer of Chrysler's minivan business would have to take on the Windsor (Ont.) unionized factory where the vehicles are built, and buy a transmission plant in order to keep building them, unless it shipped the tooling to a cheaper labor market. "There is so much overcapacity for factories for assembly, engines, and transmissions, and for a segment in decline, it is not all that attractive," says former Chrysler President Thomas Stallkamp, now a partner in private equity firm Ripplewood Holdings.

A Crowded Lane for Pickups

On paper, the Dodge Ram pickup-truck business looks like it might be attractive. An all-new truck was launched last fall, and Car & Driver magazine pronounced it better than the Chevy Silverado and Ford F150. But with housing sales and starts so depressed and the general uncertainty about a rebound, there are few investors who want to enter the cutthroat arena of selling pickups against GM and Ford. That says a lot about how the truck market has shifted in recent years.

"So goes the housing market, so goes pickup sales," says Mark Fields, Ford's president of the Americas. "A much bigger percentage of the truck business is going to the traditional work-truck contractor market, not the weekender so much anymore."

Last year, Dodge sold 246,000 Ram trucks, down 31%. Toyota, which has entered the full-size truck market with its bruising Tundra, is running into problems luring traditional pickup buyers. And Nissan, which launched the Titan pickup in 2004 with big expectations, has already said it is quitting the category. Instead of making its own pickup, it has contracted with Chrysler to supply a truck it can re-badge as its own. But Nissan executives say privately they have no interest in buying the whole truck business from Chrysler. "The pickup market is changing, and GM and Ford are going to be the ones to battle for it," says one Nissan official. "We'll let Toyota beat its head against that wall."

Little Value in Passenger Cars

Both the Chrysler and Dodge brands have little equity in the passenger-car marketplace, say industry analysts. Chrysler last year had a 2.5% market share. Dodge, including pickup trucks, had a 5.9% share. But even those figures are deceptive: Industry data show that almost 50% of Chrysler Sebring, Dodge Charger, Dodge Caliber, and Chrysler 300 cars that moved were low-margin or unprofitable sales to rental and government fleets. The industry considers a healthy level to be more like 15% to 20%.

Worse, Consumer Reports did not recommend any Chrysler, Dodge, or Jeep vehicles in its 2009 buying guide—a clear statement for any would-be buyer.

If that's not enough to render Chrysler's car brands near worthless to potential buyers, the factories where those vehicles are made are all unionized. The big makers of small cars—Volkswagen, Toyota, and Honda—continue to build plants in the U.S. and Canada but do not want to buy union-organized plants.

Michigan Land for a Song

The Chrysler headquarters building is a spectacular sight from I-75 in Michigan. But the Auburn Hills edifice and its sprawling campus sit in the middle of one of the most economically depressed areas in the country. When the building was erected in the early 1990s, it was designed so it could be repurposed into a shopping mall without too much modification if the perennially troubled Chrysler should go out of business. But there is no interest in another shopping mall in a commercial corridor where unemployment and foreclosure rates are both above 20%, and one of the best-performing malls in the state, The Somerset Collection, sits 15 minutes away in Troy, Mich.

Fiat's Options

Much will depend on what Fiat is willing to give up to get Chrysler, access to the U.S. market, and the $6 billion of U.S. government loans the White House has placed on the table.

Fiat and Chrysler have a deal in place that calls for Chrysler to use Fiat's vehicles and engines as the basis for new vehicles. Fiat, which would eventually own a majority stake in Chrysler, wants to build Fiats and Alfa Romeos alongside Chryslers and distribute them in the U.S. through Chrysler dealers.

Executives with knowledge of the negotiations between the White House, banks, and Cerberus say there is a growing possibility the Treasury will provide debtor-in-possession financing that would allow Chrysler to enter Chapter 11 and reemerge with Italian automaker Fiat as an alliance partner. But even in that scenario the banks would have to be taken care of, and secured debt holders fare the best in bankruptcy court. Unless Fiat strikes a deal with the banks in bankruptcy court, the Italian carmaker could see some of the Chrysler assets it coveted sold off to other companies.

On Apr. 22, Sanford C. Bernstein issued a report stating it believed Fiat may have to sell its CNH Global agricultural and construction-equipment unit to fund a partnership with Chrysler. That successful agricultural business has at times sustained Fiat while its auto operation rose or fell. That may be one road that Fiat CEO Sergio Marchionne—who would likely run Chrysler if a deal is reached—doesn't want to go down.

Kiley is a senior correspondent in BusinessWeek's Detroit bureau.

David Kiley is a freelance writer based in Ann Arbor, Mich.

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