Signs Chrysler Is Considering Bankruptcy For Profit

I was watching the movie Pretty Woman with my wife-to-be last weekend, and there’s a line in that movie that sums up Chrysler’s future:

Vivian: So whadda ya do with the companies once you buy ‘em?
Edward: I sell them.
Vivian: You sell them?
Edward: Well, I… don’t sell the whole company, I break it up into pieces, and then I sell that off, it’s worth more than the whole.
Vivian: So, it’s sort of like, um… stealing cars and selling ‘em for parts, right?
Edward: Yeah, sort of. But legal.

Corporate raiders are oh-so-80’s, but the reality is this: Chrysler has quite a few valuable assets. If they could somehow escape their liabilities (like all the crushing UAW entitlement and employment obligations), the $7.4 billion that Cerebus Capital paid for Chrysler last year is a smoking good deal. Here’s a short list of Chrysler assets that could be sold off:

1) The Jeep Brand. The value of the Jeep brand, a mass-market nameplate synonymous with adventure and independence, has got to be worth more than Land Rover or Jaguar combined (which were recently bought by Tata motors for $2.3 billion). I’m no expert, but I could see someone stepping up and paying $3 to $5 billion for the Jeep brand, the rights to produce all the vehicles, and the rights to sell $500 million worth of Jeep branded merchandise each year, as well as exclusive access to the Jeep dealer network.

2) Chrysler Financial. Cerebus already owns 51% of GMAC – they paid $14 billion for it about 2 years ago. While only the bankers know for sure, 100% of Chrysler Financial has got to be worth at least $5 billion, right?

3) Physical assets. Good old fashioned assets like factories, tooling, property, etc. (excluding the Jeep brand). Granted, most of these aren’t too valuable to anyone not in the business of building cars, but how many billions are tied up here? My guess – at least $8, maybe $10 billion. Foreign automakers would probably purchase most of Chrysler’s physical assets just so they could have the ability to build their cars in the U.S. and take advantage of the weak dollar, and the rest could be sold off for scrap.

4) Intellectual assets. Design and engineering expertise, patents, and proprietary information all has a value too. How much is hard to estimate, but I would bet there are some gems here and their. Let’s say just $1 billion.

5) Dealer network. Say what you will, but having a network of dealerships to sell and service your product is very valuable, especially to a foreign automaker looking to enter the U.S. market. $1 billion maybe?

I know that these numbers are just guesses, but it doesn’t really matter what I think. Cerebus bought Chrysler for $7.4 billion despite liabilities of $18 billion. Assets minus liabilities usually equals sales price, so Chrysler’s assets have got to be in that $20-25 billion range.

The only problem with this plan is that Chrysler LLC has to overcome all those pesky union liabilities before it can turn a profit from the sale of assets. Bankruptcy solves some of that problem. Bankruptcy puts all the employees (union and non-union) in the street, with a very good chance that UAW contract obligations will be nullified. Bankruptcy also alleviates Chrysler from honoring any of their supplier or credit agreements. Most importantly, bankruptcy starts the process of selling each asset off piece by piece. The only problem is that bankruptcy also forces Chrysler to use the proceeds from their sales to cover their liabilities. Because of their current liabilities, filing bankruptcy right now wouldn’t result in profits.

However, If Chrysler’s finance wizards can figure out a way to remove themselves from a significant portion of their liabilities (say, by, I don’t know, re-negotiating all their UAW contracts and off-loading their pension and healthcare obligations) they’ll be closer to “bankrupting for profit.”

Let me put it this way – if you’re looking for a sign that Chrysler, LLC is positioning itself to fire every worker and carve itself up into pieces to be sold to the highest bidder, you need look no further than the recent announcement that Chrysler is no longer leasing vehicles. It turns out that the finance department at Chrysler doesn’t think their cars are going to be worth much in 2 or 3 years. Consider that a flashing red “bankruptcy is imminent” sign.

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