Cerberus faces unwelcome scrutiny in auto industry struggle

The woes of the American auto industry have put secretive private equity firm Cerberus Capital Management and co-founder Stephen Feinberg in the one place they don’t want to be—the spotlight.

The $27 billion private equity company, named after the multiheaded dog that guards the gates of the underworld, abhors publicity, but its struggling Chrysler unit has been ardently courting the public as it tries to save itself.

Chrysler, along with rival automakers Ford Motor and General Motors, have gone to Washington, D.C., cap-in-hand to plead for cash to rescue Detroit.

This has placed the firm and Feinberg—who has shunned cameras and rarely given interviews—in the uncomfortable position of asking for public money to save a private enterprise.

Cerberus was co-founded by Feinberg and Bill Richter, now senior managing director at the firm.

Feinberg, a frequent contributor to Republican coffers, seems content to let fellow executives John Snow, a former treasury secretary in the current Bush administration, and Dan Quayle, who was vice president under former president George H. W. Bush, be the famous names at his company.

Snow’s title is chairman of Cerberus Capital Management. Quayle is chairman of Cerberus Global Investments.

It has been Snow who has been the public face of the Chrysler deal. Snow talked in a press release at the time of the deal about the “inherent strength of U.S. manufacturing and of the U.S. auto industry,” a judgment called into question by the current economic crisis.

Bailout debate

If Cerberus makes any money for itself out of any bailout, or if losses from its $7.4 billion investment are covered, there would likely be an outcry.

Trying to allay such concerns, Chrysler said Cerberus has promised that any government assistance would be used only to assist Chrysler, and not flow through to Cerberus.

Chrysler boss Bob Nardelli, in testimony to a Senate committee last month, said Cerberus “has made it clear that it will forgo any benefit from the upside that would, in part, be created from any government assistance that Chrysler LLC may obtain.”

Nardelli was previously CEO at Home Depot Inc., where he resigned in early 2007 after a year of heavy criticism of the company’s underperformance and his pay package.

“I think Cerberus is very conscious of the fact that they’re going to have to come up with some deal with the government if Chrysler is to be included,” said Joel Greenberg, a partner at law firm Kaye Scholer, which specializes in mergers and acquisitions. “Somehow they’ll have to convince the government that the bailout … isn’t going to flow immediately into Cerberus’ pockets.”

Secretive firm

For a firm trying to stay invisible, buying an American icon wasn’t the shrewdest move.

Cerberus’ DNA is reflective of Feinberg’s makeup, strikingly different from rivals such as Stephen Schwarzman at The Blackstone Group, who regularly speaks in public.

The son of a steelmaker, 48-year-old Feinberg has tried to remain private while working his way up the ladder. A Princeton University graduate, he worked at bond trader Drexel Burnham Lambert before co-founding Cerberus in 1992.

The latest Forbes billionaire list said his net worth was $1 billion.

His few public appearances have included testifying at a trial over Cerberus’ fight to pull out of a planned investment in United Rentals. Only a handful of pictures of him are publicly available. Some Internet stories about him show just a blank profile or a question mark instead of a picture.

High risk bet

Chrysler, like other companies bought by private equity firms in better times, could turn out to be both a financial and a public relations disaster for Cerberus.

“I think their reputation will be tainted,” said Harry Rady, CEO and portfolio manager of Rady Asset Management, who said he didn’t invest in any of the three automakers. “There are lots of private equity firms to choose from.”

Cerberus bought its 80.1% stake in Chrysler in May 2007 for $7.4 billion, investing $5 billion to improve the automotive group, pumping $1.05 billion into its financing unit, and paying $1.35 billion to the seller, DaimlerChrysler.

That followed its acquisition the previous year of a 51% stake in General Motors financing arm GMAC, whose situation has deteriorated as auto sales plummet, vehicle leases lose value and more borrowers miss payments.

The investments have come back to haunt Cerberus as frozen credit markets, the housing slump and rising unemployment have sliced U.S. auto sales to a 25-year low.

Nardelli warned in testimony last month hat without immediate bridge financing support, Chrysler’s liquidity could fall below the level necessary to sustain operations, putting at risk the company’s 56,600 employees.

Risk spread

The risk for Cerberus would likely be spread. Cerberus doesn’t commit more than 5% of the money in any one of its funds to a single investment and Chrysler and GMAC combined makes up less than 7% of its total investments, said a source familiar with the situation.

To people with jobs on the line, it makes little difference that Chrysler is privately owned, unlike GM and Ford.

“You can’t look at Chrysler as any different from General Motors or Ford,” said Ken Lewenza, head of the Canadian Auto Workers union. “Whether it’s run by a private company or whether it’s owned by shareholders, the reality is that … all three companies are facing the crisis with equal pain.”

Beyond an initial meeting at the time of the sale, the Canadian Auto Workers’ Lewenza said, there has been no contact with Feinberg. “We have had absolutely no contact with him at all because any reference to him is referred back to the Chrysler management team,” the union chief said. —Megan Davies and Poornima Gupta, Reuters