Billionaire turnaround financier Wilbur Ross says he has a potent weapon in his bid to build three giant auto parts companies: a debt-free balance sheet.
Ross, who made a bundle buying bankrupt steel makers, is prepared to buy up dying auto parts makers at rock-bottom prices to create a trio of megasuppliers.
The chief executive officer of WL Ross & Co. LLC boasts a $4.5 billion war chest to finance his global auto parts venture. He plans three giant new companies - working in safety systems, metal bending and interior trim - whose collective size could exceed Delphi Corp.'s $26.2 billion in global original-equipment sales last year.
``We will undoubtedly make errors'' while consolidating part of the industry, Ross, 68, said in an interview at his midtown Manhattan office this month. ``We won't make the mistake of too much debt.''
A decade of debt financing helped send nine of the auto industry's largest suppliers into bankruptcy court since 1999 and left many more with junk credit ratings. Still more debt-bloated suppliers are headed for the scrap yard if North American auto production declines.
But bargain-basement investors such as Ross then can create healthy companies by snapping up assets of a failed company after the bankruptcy court has wiped away debt and legacy costs.
``Detroit is at a tipping point,'' said Merrill Lynch analyst John Casesa in a report. Delphi is in bankruptcy court. Billionaire investor Kirk Kerkorian is jockeying for position at GM and Ross' shopping binge signals that the industry is ready for a radical financial makeover.
Fit and trim
Ross' first goal is an interior trim company with up to $15 billion in annual sales. Debt would be virtually nil, he said. ``To have something that large with no debt would be quite an unusual creature in auto parts,'' Ross said.
Don't underestimate him, said Pete Peterson, the retired automotive steel marketing chief for U.S. Steel Corp., who has observed Ross for years. ``He changed the steel industry in this country, and he'll change the auto industry.''
Ross' auto parts strategy: ``Become very, very big,'' be virtually debt free and have a global reach.
Last month he agreed to pay more than $100 million in cash for $600 million in sales from the European operations of Collins & Aikman Corp.
And he may have an edge in the bidding for Collins & Aikman's U.S. operations. The company has been mired in Chapter 11 proceedings since May. Ross owns $50 million of the company's $750 million bank debt. He also owns $15 million of the $150 million of financing the company obtained for its Chapter 11 reorganization, according to statements Ross provided the court in November.
The Collins & Aikman companies would be combined with International Automotive Components Group - Ross' planned joint venture with Lear Corp.'s interior trim business. It would generate pro forma sales of $6.09 billion, making Ross' venture among the biggest players in the $75 billion global auto interior trim sector.
Tower of interest?
Asked by Automotive News, a Plastics News sister publication, if he plans to buy Tower Automotive Inc., of Novi, Mich., for his second company, Ross said he was interested in the company but would not say if it's on his shopping list.
Tower, also in the midst of Chapter 11 reorganization proceedings, fits the profile of a company he needs for his second auto parts platform: a giant metal-bending supplier he can nourish to $10 billion to $15 billion in annual sales.
Automotive parts stamping is among the industry's most distressed sectors, and so far has defied consolidation.
Tower, the world's largest manufacturer of vehicle frames, filed for Chapter 11 in February because of too much debt and spiking steel prices. Tower's management soon must decide whether to try to emerge from bankruptcy court or to sell assets.
Asked about Tower, Ross said: ``We are looking at everything that is a logical candidate in these sectors. I think Tower is a good company.''
Tower Chief Executive Officer Kathleen Ligocki, in an e-mailed statement, acknowledged she has spoken with Ross about the general industry, but has not met him personally.
``I do look forward to meeting him,'' she wrote. ``He is one of the dynamic forces shaping the auto industry today. For Tower, it is too early to say exactly how we will exit [bankruptcy proceedings].''
The first of Ross' metal-bending buyouts came from his September acquisition of a 25 percent stake in Oxford Automotive, a French stamping company. He paid $30 million.
Ross' third platform, a Tier-2 auto safety company, would be smaller.
The base for that platform was formed earlier this month with his $51.2 million purchase of a 77 percent stake in Safety Components International Inc., of Greenville, S.C., a supplier of automotive air-bag fabric and cushions.
Ross said safety is a growth business despite market dominance by TRW Automotive Inc. and Autoliv Inc. ``Air bags [per vehicle] will grow from two to four,'' he said, ``That is a doubling of that market.''
The `king of distress'
The auto supplier industry is punctuated by ``for sale'' signs. But many bargain hunters are waiting for the parts-making sector to bottom out. Not Ross. He estimates that half the world's plastic trim business is for sale.
``Ross is the king of distress,'' said Peter Marcus, a steel industry analyst and managing partner of World Steel Dynamics of Englewood Cliffs, N.J. He has known Ross for a decade. ``He understands the forces at work when a company is in crisis. He's brilliant at picking his spots, and he usually wins.''
``He is a very tough, very shrewd, and a very good negotiator,'' said Al Koch, vice chairman of turnaround firm AlixPartners LLC, of Southfield, Mich.
He is also among the best-known vulture investors. They buy up bonds and bank debt in failed companies to gain control, not to liquidate. Ross is a buy-fix-and-sell investor. The firms he buys out of bankruptcy court have already been stripped of their pension, health and other legacy costs.
Building an auto parts platform of debt-free companies will make him a formidable competitor. It allows him to maximize cash flow. He has more freedom to act because he is less beholden to banks and bondholders.
In recent years Ross bet heavily on the scrap-heap U.S. industries - textiles, coal and steel. A December 2003 BusinessWeek headline asked: ``Is Wilbur Ross Crazy?'' Hardly. The bankrupt steel companies he consolidated were sold for $4.5 billion, leaving him a personal profit estimated at $260 million, according to The Wall Street Journal.
This clean-sheet-of-paper approach keeps costs down. ``We are obsessed with being the low-cost producer,'' he said.
Still, he said, the auto industry's complexity far exceeds that of steel. ``I stay up at night wondering if we are right,'' he said.
His comforting thought: ``Making an error is a lot less threatening when you have a strong balance sheet.''
Automotive News staff reporter Amy Wilson contributed to this story.
* * *
Ross in profile
Wilbur Louis Ross
Born: Nov. 28, 1937, Weehawken, N.J.
Education: BA in English literature, Yale, 1959; MBA, Harvard, 1961
Title: Chief Executive Officer, WL Ross & Co. LLC
First job: Parking cars at a racetrack in Monmouth, N.J.
College nickname: Waldo
Personal: Married to third wife, Hilary Geary. Two daughters by first marriage. Helped finance second wife Betsy McCaughey's unsuccessful 1998 campaign for New York governor before marriage ended in divorce.
Source: BusinessWeek, Automotive News research