Private equity settles in for the long ride

Since Cerberus Capital Management completed its $7.4bn (£3.7bn) takeover of the once-mighty Chrysler in the summer, the car industry has been watching closely for insights into the private equity giant’s intentions for the sector. It may be about to get some answers.

News that the management team is axing more than 10,000 jobs – 14% of Chrysler’s workforce – was swiftly followed by an announcement that the marque’s UK managing director Peter Lambert is stepping down (MW last week). Those hoping for a seamless transition of power look set to be disappointed.

These developments will be particularly interesting for Jaguar and Land Rover, which are being pursued by private equity firms as the sale of the famous British marques moves into its final stages.

In the front seat
Ford is understood to have shortlisted One Equity Partners, fronted by former Ford chief executive Jacques Nasser; Indian conglomerate Tata; and carmaking rival Mahindra & Mahindra. Cerberus and another private equity group, Ripplewood, also expressed an interest in the early stages of the sale.

Founder of motoring consultancy The Automotive Partnership, Mike Moran, says: “It is interesting that private equity is starting to look at what was historically a sector that consumes enormous amounts of cash.

“These companies are normally after a quick turnaround – three years at the most – with a minimum 20% internal rate of return. Clearly with any car company, particularly one that could do with improving, like Chrysler, the timescale is going to be a lot longer than that.” Following the completion of the Cerberus deal, DaimlerChrysler – created by a $36bn (£21.7bn) merger between German-owned Daimler and American giant Chrysler in 1998 – was broken up and a new company, Chrysler LLC, was established.

Chrysler LLC will manage the Chrysler, Jeep and Dodge brands, while Mercedes-Benz Cars and Commercial Vehicles will be operated by the new Mercedes-Benz Group.

However, beyond the basic structure, Cerberus has yet to outline its plans for Chrysler. Moran believes Cerberus may have more of a long-term interest in the automotive sector than the average private equity group.

That view is shared by Institute of Automotive Industry Research assistant director Paul Nieuwenhuis. He says: “The Chrysler brand has a certain something about it that they can work with, and if they can keep that going with relatively low investment levels it might just work.” But Nieuwenhuis thinks Tata, frontrunners in the race to buy Jaguar and Land Rover, may be a more suitable home for the British brands than private equity.

Tata was founded in 1945 to make heavy vehicles, and began producing trucks in the early 1990s. The group also owns steelmaker Corus and Tetley Tea, but chairman Ratan Tata is a car enthusiast who has ambitious plans for the automotive division.

Tata’s tactic
Nieuwenhuis adds: “If Tata has a vision, that is a positive thing. It has the resources to do it and a desire to become a global player.” Cerberus’ takeover of Chrysler is seen by many as a template for private equity involvement in the automotive sector. But it is too early to say whether its ownership will have a positive or negative effect on the brand.

The Jaguar and Land Rover marques may yet end up in the hands of private equity, although it is looking increasingly likely that the sale will herald the birth of a new player in the global car market.

As Moran says: “Tata is known in the industry but not really by consumers. For Tata, buying Jaguar and Land Rover would be instant fame.”