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Monday, October 23, 2006

If Delphi Goes To Private Equity, Is GM Next? (GM)(F)

Late word comes from Detroit that big buyout firm Rippleword, may make an offer to buy bankrupt auto parts company Dehpli. The price is likely to be north of $10 billion, but the people at Ripplewood are no fools. They must believe that as Delphi sheds expensive jobs in the US that it can return to profitability.

A deep pocket owner might also help Delphi resist further product price erosion due to demands from its auto company clients. A Ford supplier, bankrupt Collins & Aikman, has recently refused to supply the car company parts that it believed were being sold too cheap. The move even shut down some Ford plants in Mexico.

A hedge fund, Appaloosa, owns 9% of Delphi, and there are creditors and the UAW to deal with. But, the fact that a hedge fund and buyout firm are circling Delphi is a sure sign that it is viewed as undervalued.

Investors and the press have to be asking themselves whether the rocket scientists at large private equity operations see similar value in Ford and GM. Both trade for less than 10% of sales, while Toyota trades for about 90%. Both have huge problems, but both have fairly substantial cash reserves. And, those cash reserves may remain largely intact if costs are cut enough and market share becomes stable. Those are big “ifs”, but so are the “ifs” at Delphi.

Looking at the options for the two largest US car companies, it would seem that Ford would be the easier target for a buy-out. It is in worse share, but it has controlling shareholders in the Ford family.

And, they might want to take the money and run.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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