Allison Transmission deal in trouble: Is this the death knell for the Chrysler deal?

On June 28, 2006, Yahoo reported the sale by General Motors of it's Allison Transmission Unit to two private equity firms - The Carlyle Group and Onex Corporation.

The terms of the sale were:

  • General Motors gets $5.575B in cash
  • Carlyle and Onex put up $1.5B in cash (split evenly)
  • Allison takes out $3.5B in bank loans
  • $1.1B in "high yield" or "junk" bonds are issued by the company.

    The underwriters of the loans - "Citigroup Inc., Lehman Brothers Holdings Inc. and Merrill Lynch & Co." had planned to sell $3.1 billion of the loans to other banks.

    Well, it turns out that other banks don't want any part of it.
    "Allison Transmission, a highly profitable unit of General Motors Corp. based in Speedway, Ind., has gotten stuck in a traffic jam in the debt-financing market.Wall Street firms postponed a sale of $3.1 billion in loans that would pay for the leveraged buyout of Allison by private-equity firms, said a person familiar with the matter. While the sale of Allison to Carlyle Group LP and Onex Corp. is highly likely to proceed, the trouble raising debt from investors complicates matters for the company and its bankers."
    So now the underwriters are stuck and the junk bond issuance is on hold. I would assume the deal will still close though, since Allison is a very profitable company and it makes sense to me to buy it. Also from the WSJ article:
    "The company posted $2.3 billion in revenue last year and posted an operating profit of nearly $350 million, making it one of GM's highest-margin divisions."
    By my calculations, that's an Operating Profit Margin of 15.22%.

    From their website:
    "Having literally invented the category, today the company continues to dominate with an 80% market share of all medium- and heavy-duty commercial fully automatic transmissions produced."
    Further:
    "This support network provides service and technical support worldwide to the division's 250 OEMs, and the many fleet owners and operators, and end users. Allison Transmission has a workforce of over 4,000 salaried and hourly employees."
    I believe it also comes with a big chunk of intellectual property. From the President's Message:
    "The employees of Allison Transmission have over 600 patents, making the company one of the most prolific patent organizations within General Motors."
    So if a company that has 80% marketshare and 15.22% operating profit margin isn't able to get 1.1 billion in Junk Bonds, how is a company like Chrysler going to get $60+ billion from the debt markets for a buyout from Daimler by Cerberus?

    And how are GM/Ford/Chrysler going to fund a VEBA plan to shift the pension plan/health care benefits over to the UAW? This is going to require even MORE debt.

    The news of the postponement of the Allison Transmission deal caused a pretty big shift in the derivatives markets.
    "The cost of protecting GM's debt for five years with credit default swaps widened by 61 basis points to about 568 basis points a year, or $568,000 for every $10 million of principal protected, according to data from various brokers and dealers."
    Unless the appetite for risk increases again in the credit markets AND the unions give some hefty concessions, I believe the Big 3 are in very big trouble.

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