Delphi rescue deal in dock as Appaloosa pulls out

05 Apr 2008


''So near, yet so far'', must be Delphi Corp. chairman Steve Miller's lament after one of the chief investors, Appaloosa Management LP, pulled out of the deal that stood a good chance of bringing the beleaguered auto parts company from two years of bankruptcy back on its own feet.

This deal was on the verge of completion when Appaloosa declined to participate, citing violation of a stock purchase agreement by Delphi, along with contentious issues of interest payments, the value for shareholders and management compensation. Together with a $6.1 billion loan, this $2.5 billion deal was expected to help make the Troy-based supplier solvent again, after languishing under bankruptcy protection for the last two years.

However, the hedge fund terminated the stock deal Friday morning, saying Delphi had violated the contract in several ways, including giving Delphi's former owner, General Motors (GM), a larger stake in the company's exit loan. Appaloosa feels that this will give GM undue influence in Delphi's functioning and undermine its own presence in the company, as well as interfering with Delphi's ability to win business outside of GM. It also expressed reservations whether Delphi would have managed to raise the $6.1 billion loan amount by the Friday deadline, and cited the current credit crises.

Delphi contends that it fulfilled its side of the agreement and followed Appaloosa's statement with its own, saying it had raised the needed loan money and was ready to do the deal but that Appaloosa had backed down.

The $6.1-billion in exit facilities that were made available to the company in connection with Friday's closing were successfully arranged by J.P. Morgan Securities, Inc. and Citigroup Global Markets, Inc., in accordance with prior orders entered by the United States Bankruptcy Court for the Southern District of New York.

The company is "prepared to pursue actions that are in the best interests of Delphi and its stakeholders," the company's chief restructuring officer John Sheehan said in a statement, and also expressed hopes of exiting Chapter 11 bankruptcy protection at the earliest. ''We are extremely disappointed that our plan investors have taken the position that they are not obligated to fund their plan investment commitments,'' he said.

However,  Appaloosa isn't the only party which has expressed its opposition to GM's increased participation in Delphi's rescue package. Under the restructuring plan approved by the court and creditors, GM can offer up to $750 million in loans. A judge recently ruled that a GM affiliate, but not GM itself, could offer two other loans, one of $2 billion and a second loan worth as much as $825 million.

As a result of GM's increased payout, as many as five of the six investors in $2.55 billion equity deal had voiced their concerns about GM expanding its influence over Delphi. They had argued the loans would "adversely affect the company and the investors by materially increasing and concentrating GM's ongoing influence and control."

These investors are Harbinger Capital Partners Master Fund I Ltd., Merrill Lynch, Pierce, Fenner & Smith Inc., UBS Securities LLC and Pardus Capital Management LP. The sixth investor, who did not challenge GM's additional contributions, was Goldman Sachs.

However, Appaloosa has not completely washed its hands off the deal. The management said it is still in talks with Delphi, and could potentially do a deal "in a capacity different than currently envisioned by the agreement."

A letter from Appaloosa's president David Tepper, a well-known investor in distressed companies, said he had been "actively engaging in discussion to resolve our outstanding issues in a mutually acceptable manner."

Tepper also asserted Friday that he is now entitled to an $82.5 million fee, because Delphi breached their agreement by seeking an alternative transaction. It referred in its filing to Delphi's effort to take more loans from GM, a move that threatened the power of the investor group.

Delphi joins a list of investment deals that have stalled or died because of the deteriorating credit market or changes in the companies' financial outlook. They include buyouts of Clear Channel Communications Inc., the largest U.S. radio broadcaster, and SLM Corp., the biggest U.S. student-loan provider.

Delphi was originally formed as the Automotive Components Group by General Motors in 1994, renamed as Delphi Automotive systems in 1995, and became a fully independent publicly traded corporation in 1999.

Delphi had gone into bankruptcy in 2005 after being investigated by the Securities and Exchange Commission (SEC) for irregular accounting practices and financial transactions. However, it continues to have deep ties with its parent GM, who is also adversely affected by its financial woes. After this latest announcement, GM said it would continue to support Delphi's efforts to emerge from bankruptcy.

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