Chrysler's Looming Tag Sale

If the carmaker is forced to sell assets, as bondholders claim they want, what would Chrysler's Jeep, minivan, and Dodge truck lines go for?

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

By David Kiley

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."

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