GM To Use Bailout Money To Finance LBO Of Delphi

What else haven’t they told us? The WSJ is reporting that GM plans to use some of the $30 billion of DIP loans it’s set to receive from the Government to finance the the leveraged buyout of auto-parts company Delphi. This transaction is part of the GM viability plan that the government’s auto task force and GM jointly created. In other words, the Obama administration has known about this from the get go.

From the WSJ:

GM will provide more than $2.5 billion of the $3.6 billion necessary for Beverly Hills-based buyout firm Platinum Equity to gain control of Delphi, according to a person familiar with the matter.

Since Monday, GM and the government have been mum about who would provide the money to help Delphi emerge from bankruptcy. A GM spokeswoman wouldn’t comment on specific figures but noted in a statement that funding for the Delphi buyout was “incorporated into GM’s revised viability plan.”

GM’s involvement represents new ground in its use of government support. The Obama administration has begun to use private-equity firms to take over failed banks but has yet to use them in the auto industry.

Such transactions can prove hugely profitable for a buyer, depending largely on financing costs and the buyer’s ability to turn around the business.

Under the terms of the transaction, Platinum is expected to invest no more than $750 million, according to the person familiar with the deal. GM would provide the balance in financing.

Those financing commitments may or may not be drawn upon in the future, depending on how Delphi performs. The terms of the GM loans couldn’t be learned.

As part of the deal, GM is buying back four Delphi plants and Delphi’s Saginaw, Mich., global steering division. In addition, it’s providing a $250 million loan to fund Delphi’s operations while it remains in Chapter 11.

The Delphi rescue is a turnabout for GM. Delphi has languished in bankruptcy court for nearly four years, and it has been an enormous cash drain on GM. Earlier this year, GM said it wasn’t interested in propping up the auto-parts maker any further.

I guess we have to label this a backdoor, leveraged bailout of Delphi. The administration is getting pretty good at financial engineering aren’t they? But really, what gives here. We were told that one of the reasons so much of the taxpayers cash going into GM was going to end up as equity was to ease the cash flow burden on the company once it emerges from Chapter 11. Now they turn around and propose using that precious cash to layer debt on a parts manufacturing company.

If GM couldn’t handle much leverage, why is it possible that Delphi can? Their cash flow dynamics surely aren’t that much different from GM’s, in fact I would venture to say that they must be downright unpredictable given that their business is subject to the whims of manufacturers’ production scheduling.

Delphi has been languishing in Chapter 11 for over four years. That is more than enough time for a whole host of buyers to have kicked the tires and figured out whether it was worth anything. Presumably it’s been found wanting until now. If private capital couldn’t make a case for acquiring the company during that period what is it that has changed and brought about this turn of events.

Right now there are more questions than answers. The answers need to be forthcoming very quickly. I just don’t think that the prospect of GM laying off workers, shuttering plants and sticking knives in the backs of thousands of its dealers while it uses public assistance to facilitate a leveraged buyout of a bankrupt parts supplier is going to go down very well.

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