April 28, 2007
The PBGC and Daimler-Chrysler's Kool-Aid
I live and teach in Michigan, and the news here is not surprisingly obsessively focused on the auto industry. The Detroit press does an amazing job of in-depth coverage of the industry, although it tends towards cheerleading and even self-delusion in its coverage (The Detroit Free Press front page headline yesterday was: "'IT'S A NEW FORD'': Strong results take pressure off workers worried about jobs"). Today's Detroit Free Press headline was "Magna Leads Chrysler Bids"; the paper reports that Magna International, the Canadian auto parts maker is now perceived to be the favored buyer for Chrysler by the United Auto Workers who still publicly want to keep Chrysler with Daimler and its deep pockets.
The so-called "auction" for Chrysler is being held under a media glare. Besides Magna there are three other reported bidders for Chrysler: two private-equity firms, Blackstone Group and Cerberus Capital Management, and billionaire Kirk Kerkorian who has offered $4.5 billion for Chrysler. According to the Detroit Free Press article, second-round bids in the auction are due next week. Although Daimler is refusing to let Kerkorian participate in the auction.
The constant media leaks and public comments by Chrysler and Daimler are a really bad way to run an auction. It is setting up expectations for a sale that has a significant chance of not succeeding. This is due to a number of self-evident and reported road-blocks, including the unions, lack of interested bidders (four is a small number), and the simple fact that the fire-sale price Daimler is seemingly willing to accept for Chrysler may not be low enough.
There's another big problem with any Chrysler sale, though, that hasn't been highlighted in the media. Daimler as a whole has disclosed underfunded pension plan obligations of $21.6 billion; it doesn't break out the amount attributable to Chrysler but it has been reported that Chrysler's has pension and health care liabilities are approximately $16.5 billion. Chrysler is a troubled company and therefore any sale is likely to require approval by the the PBGC (the U.S. agency responsible for insuring underfunded pension plans) under its Early Warning Program. The PBGC has a functional veto over acquisitions of plan sponsors (i.e., Chrysler) stemming from the PBGC's ability to terminate an underfunded pension plan when it believes a takeover transaction may increase its insurance risk on the pension benefits. The PBGC has often used its functional veto power over acquisition of companies with underfunded plans or plans controlled by troubled companies as a lever to force certain concessions designed to further protect the benefits accrued under the plans. For example, in 2002 the PBGC forced PricewaterhouseCoopers to contribute $264 million to its underfunded plans as the price of approving the sale of its consulting business to IBM.
Depending upon its assessment of Chrysler's financial situation, the PBGC may demand significant concessions from Daimler (and any buyer) for its approval of any sale: a contribution by Daimler or the buyer to the Chrysler pension plan in the billions of dollars to and possibly even an on-going commitment from Daimler to guarantee the plan. This is a commitment Daimler, looking for a clean break from Chrysler and a positive announcement to its hopeful shareholders, would likely be unwilling to make. Daimler's wishful talk of a Chrysler sale still has a long way to fruition.
April 28, 2007 | Permalink
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