One on One with John Novak, Auto Analyst, Morningstar
Monday, May 14, 2007
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SUSIE GHARIB: More analysis now on Cerberus' $7.4 billion deal to buy Chrysler from DaimlerChrysler. Joining us now, John Novak, auto analyst at Morningstar. Hi John.
JOHN NOVAK, AUTO ANALYST, MORNINGSTAR: Good evening.
GHARIB: Cerberus has a great reputation when it comes to turning around distressed companies, but do you think that it can fix Chrysler?
NOVAK: I think certainly are going to face a challenging road. I mean the business as a smaller independent auto maker is going to face challenges just maintaining its U.S. market share is going to be difficult. But that said there are opportunities to cut costs, manufacturing, distribution, probably in the financial services business. There are opportunities to exploit growth in emerging markets. I think Cerberus will attempt to do all those things. It gives them a fighting chance.
GHARIB: As we reported, the UAW endorsed this deal today. Do you think, looking ahead, as they're going to be called upon to make cost cuts and other concessions that the union will continue to have this kind of flexibility?
NOVAK: Well, I think they'll go into it with an open mind. At a minimum I think you'll agree, you'll see them agree to the kind of concessions they granted Ford and General Motors with respect to health care last year. That's something they didn't give Chrysler because they felt the company was protected by a wealthy German parent. I think you'll see them grant some concessions along those lines. And then when we go into the summer labor negotiations, it remains to be seen what happens, but you can be certain that all of the Detroit auto makers are going to be pressuring the UAW for additional cuts.
GHARIB: As you look out, let's say five years, what will we be saying about Chrysler? Will it be better off?
NOVAK: I think it will be better off. I think the company will be smaller and have a more focused product line. I think they can restore the business to some level of profitability. And about that time I think you'll see Cerberus look for an exit strategy. That could include selling it to another auto maker, entering into a partnership agreement or selling the business to another private equity firm.
GHARIB: Or selling parts of it? Or selling parts of the business, breaking it up as we suggested in our report tonight?
NOVAK: That's certainly a possibility. I mean, an exit strategy is important in any private equity transaction. There are a number of avenues they can take, but ultimately before they think about that, they need to restore the business to some level of profitability and that will be the focus here for at least the next couple of years.
GHARIB: A lot has been said that this is the first private equity deal in the auto industry. Who do you think is the next candidate?
NOVAK: Well, I don't think you're going to see a big rush right now into the auto industry by private equity at least among the auto makers. You've seen a lot of activity in the parts supplier arena. But as you look toward potential candidates, I think Ford is a name that's been tossed around. It's just speculation. The family still has a tight control on the company and at this point, that's just speculation. There's also the possibility of a company like Nissan perhaps down the road looking at a transaction, but right now I think private equity is going to focus on the parts making side of the industry and any activity among the auto makers is likely to be a ways off.
GHARIB: Let's talk a little bit about the speculation today surrounding the Ford founding family and speculation that it may sell off some of its stake to another buyer. What are your thoughts on that? Is that really just a rumor or is it a possibility?
NOVAK: Well, right now it's just a rumor. The family's lawyer came out and said that they are not interested in selling the stakes. But I think the Ford family is probably having some intense internal debates about what to do given the state of the business. They need to think about how they're going to protect their wealth. Certainly selling off a stake would be one way to do that. So it's definitely something that they have debated and they'll continue to debate and we'll have to see what they ultimately decide.
GHARIB: OK. All right. We will see. Thank you so much, John, for coming on the program.
NOVAK: Thank you.
GHARIB: My guest tonight, John Novak, auto analyst at Morningstar.
