Platinum deal may face detour
Platinum Equity, the Beverly Hills investment firm, is hitting a few speed bumps in its quest to buy bankrupt auto parts maker Delphi Corp.
The proposed $3.6-billion acquisition has the backing of Delphi’s former owner and largest customer, General Motors Corp., as well as the federal government. But opposition from some of Delphi’s creditors has raised the possibility that other bidders may emerge to challenge Platinum.
Whether these head winds combine to scuttle the deal won’t be known for at least a month. The judge in Delphi’s Chapter 11 bankruptcy case has scheduled a July 23 hearing, at which he could approve the company’s reorganization plan and approve a new owner.
Platinum’s deal to acquire Delphi was announced June 1, the same day that GM filed for Chapter 11 bankruptcy protection.
Failing to snag Delphi would be an unwelcome setback for Platinum, which specializes in acquiring distressed companies. With big pieces of the U.S. economy in shambles, Platinum and its chief executive, 44-year-old billionaire Tom Gores, have had plenty of rubble to pick through lately.
Not including Delphi, Platinum has launched or completed deals to acquire half a dozen companies this year in industries including computers, commercial real estate services and garbage equipment.
The firm displayed a genuine taste for risk, however, when it waded into the troubled newspaper business with its March purchase of the San Diego Union-Tribune.
Its proposal to buy Delphi seems equally bold because the company has been operating under bankruptcy protection for almost four years and depends on an auto industry that is suffering its worst sales slump in decades.
“You tend to find us in markets that are facing the most amount of distress at any given time,” Platinum Principal Mark Barnhill said last week. “So what are we looking at now? We’re looking at a lot of newspapers and we’re looking at a lot of automotive companies.”
Platinum’s spurt of deal-making comes as the private equity industry in general has fallen dramatically from its recent heights.
Announced private equity deals dropped 60% last year compared with 2007, to $211 billion, according to Bloomberg News data.
The poor environment didn’t prevent Platinum from raising $2.75 billion in September for a new leveraged buyout fund -- $1.25 billion more than planned.
The firm’s strategy is to buy troubled companies and then bring operational expertise to areas including information technology, marketing and cash management in an effort to turn the business around before selling it. Founded by Gores in 1995, Platinum has completed more than 100 acquisitions with a total value of more than $27.5 billion.
The firm typically owns a company for five years or more, although not always. Platinum bought PNA Group Holding Corp., an Atlanta metal processor, in 2006 and then resold it in 2008 -- reaping 25 times its original $17.5-million investment.
Buying money-losing Delphi would add one of the world’s biggest vehicle-parts makers to Platinum’s budding auto portfolio. The firm this year bought Alcoa Inc.'s wire harness and electrical distribution business, which primarily supplies auto equipment manufacturers.
(In late 2007, Platinum was poised to acquire PPG Industries Inc.'s automotive glass business but the deal fell through, resulting in a still-lingering court battle between the two companies.)
Delphi makes a variety of automotive products, including powertrains, steering systems, safety equipment and mobile electronics. Based in Troy, Mich., the company employs 133,000 workers in 34 countries and had sales of $18.1 billion last year, according to its website.
Barnhill said Platinum had been examining Delphi’s operations for three years before the proposed sale was announced three weeks ago.
Although GM would provide much of the financing for the deal, Platinum would put up $250 million in cash when the deal closes and put an additional $250 million in a fund that Delphi could draw on as needed, Barnhill said.
As part of the deal, GM would acquire a handful of Delphi’s North American plants and assume responsibility for its pension plan for 45,000 U.S. hourly workers.
“Our job is going to be to structure ourselves for survival and long-term success,” Gores said Friday. “That means creating an efficient company, taking care of your customers and keeping costs in line.”
Gores said he couldn’t predict when auto sales would rebound, but “once the auto market starts to come back, we will be ready.”
Delphi’s lenders and unsecured creditors have objected to the proposed sale, labeling it a “sweetheart deal” that provides “extraordinary returns” for GM and Platinum while leaving creditors with “a mere pittance.”
After a tense June 10 hearing in U.S. Bankruptcy Court in New York, U.S. Judge Robert Drain ordered that a formal auction be held so potential offers from Delphi’s lenders and other possible bidders could be considered.
“What’s so special about Platinum?” Drain asked during the hearing. “They probably have a lot of money; they have good lawyers. Other people have a lot of money and good lawyers.”
Delphi’s bankruptcy lenders said they might make a bid, and corporate raider Carl Icahn was also rumored to be interested. It’s also possible that Delphi’s unsecured creditors may try to put together a bid.
Meanwhile, business news channel CNBC aired a report Thursday night on a 2006 sexual harassment lawsuit and a 2007 wrongful termination suit filed against Platinum that included salacious allegations of inappropriate behavior by some of the firm’s male executives toward female subordinates. Both suits were later dismissed.
In a statement, Eva M. Kalawski, Platinum’s executive vice president and general counsel, described the lawsuits as “gratuitous” and called the allegations “unfounded.”
Delphi declined to comment on the suits other than to say the matters were “unrelated” to the company’s dealings with Platinum.
Despite the potholes, Platinum still expects to emerge from the July 23 hearing as Delphi’s new owner.
“Our expectation is that we will be the highest and best bid that comes out of this process and that ultimately ensures the future vitality of this business,” Barnhill said.