The UAW’s Chrysler stake: how 55% = 0%
A friend sent me a copy of a brochure (click here for a copy) that the UAW is circulating to its Chrysler workers, or those of them that remain, offering details on the proposed deal with Fiat and the U.S. government. The pay and benefit cuts are nasty, but hardly a surprise. What is a surprise is that the UAW’s equity stake is even less impressive a thing than it seemed on first glance. And the first glance wasn’t all that impressive to start with.
Before proceeding, a reminder: the stock would not be owned directly by the union, but by a trust, known as a VEBA, established to pay medical benefits to retirees. That already puts a layer of distance between the union and the company (with the union already serving as a layer of distance between the workers and the company). Even with that in mind, the terms of the deal suck out loud.
• Chrysler stock hasn’t traded publicly since Daimler took it over in 1998. Cerberus, a private equity firm, bought 80% of Daimler’s stake in 2007, keeping the stock in private hands. But should Chrysler recover and offer its stock to the public, and should that stock appreciate in value, and should the UAW ever choose to sell those shares for cash, it would have to turn any amount in excess of $4.25 billion to the U.S. government. The terms of the Cerberus deal valued the firm at $9.25 billion just two years ago. Obviously that was an inflated price, but it does give some idea of what a recovered Chrysler might be worth. At that level, the VEBA’s 55% stake would be worth $5.1 billion. So, basically the VEBA would be denied any serious participation in Chrysler’s recovery.
• So instead of looking to make a buck, might the UAW be able to exercise some control over the company for the longer term? Ha, of course not. As I’ve already pointed out here, the VEBA’s 55% stake in the firm would give it just one seat on the nine-member board, the same as the government of Canada, which would have a 2% stake. And, in a particularly lovely touch (quoting the brochure), “the VEBA will be required to vote its Chrysler shares in accordance with the direction of the Independent Directors on Chrysler Board [sic].”
A headline on this section of the UAW brochure reads, “New funding structure aids company viability.” And the governance structure—assuming the bankruptcy court goes along with it—gives management a blank check, despite more than half the shares being held in the name of the workers. Ah, pension-fund socialism.
LBO News asked one of the VEBA trustees how they ended up with such a stinky deal. The answer: “Negotiation.”