Centerbridge to pump $500m into bankrupt auto parts maker

Centerbridge will buy $500 million-worth of convertible stock in bankrupt auto parts company Dana, which has reached an agreement with the United Auto Workers and the United Steel Workers unions to replace the company’s health care plans with tax-deductible trusts.

Centerbridge Capital Partners has entered into an agreement to invest up to $500 million (€367 million) in bankrupt auto parts maker Dana Corporation, which has simultaneously reached a settlement with unions regarding $1.1 billion in un-funded workers’ benefits.

The New York-based firm will pay cash in exchange for convertible preferred stock, and has also agreed to facilitate addition funding from other investors of up to $250 million in convertible preferred stock. The closing of the deal will be subject to Dana’s filing of a plan of reorganisation and a disclosure statement by 3 September 2007. Centerbridge’s investment is estimated to be worth about 25 percent of Dana’s total stock, post-restructuring.

Echoing Cerberus Capital Management’s $7.4 billion agreement to buy Chyrsler and that deal’s eventual union support, Centerbridge and Dana worked with unions on a solution to combat costs associated with workers’ healthcare and benefit plans. The firms struck an agreement with the United Steel Workers and the United Auto Workers to replace retiree and employee healthcare and long-term disability obligations with tax-deductible trusts, to which Dana will contribute $700 million in cash and $80 million in common stock, post-reorganization. The arrangement will relieve the company of $1.1 billion in unfunded non-pension benefits and long-term disability obligations to USW- and UAW-represented employees, and save the company over $100 million per year, according to a statement.

“Through our negotiations with the USW and the UAW, and negotiations with Centerbridge for the investment that will contribute to fund the [trusts], we have reached what we believe are fair and constructive agreements,” Mike Burns, Dana chairman and chief executive, said in a statement.

The agreement with unions comes as one of the US’ largest and most influential unions, the Service Employees International Union, has ramped up its “Behind the Buyouts” private equity campaign. Among its goals are for workers to have a louder voice in buyout negotiations and share in financial rewards.

Toledo, Ohio-based Dana makes axles, driveshafts, and other service parts. In March 2006, it filed for bankruptcy protection for its US operations, joining the ranks of suppliers hurt by the struggling US auto industry. By last November, it had generated more than $2 billion in losses over the previous five years.

The US automotive industry has gained popularity among private equity firms. In addition to multiple investments by Cerberus, Onex and The Carlyle Group recently acquired a division of General Motors for $5.6 billion. The Carlyle Group also bought the struggling Goodyear Tire & Rubber’s Engineered Products division for $1.5 billion in March.
The Dana deal is Centerbridge’s first investment in the troubled US automotive industry, though the November hire of former GM advisor Steve Girsky suggests it will be an area of increasing focus for the firm.

It is Centerbridge’s fourth investment since it was founded in 2006 by Mark Gallogly, the former head of The Blackstone Group’s private equity programme, and Jeffrey Aronson, a former distressed securities expert from hedge fund Angelo Gordon. Centerbridge closed its first fund on $3 billion in September of 2006, and has since made investments of undisclosed amounts in agribusiness firm GSI Holdings and a large builder of retirement communities. The firm also partnered with Fortress Investment Group on a $8.9 billion agreement to buy Penn National Gaming, a publicly traded operator of casinos and horse racing facilities.