Updated from 11:05 a.m. EST
Hedge funds and private equity firms are fighting over the scraps of the U.S. auto industry.
Highland Capital Management jumped into the fray Thursday, proposing a $4.7 billion financing plan to bring
, the struggling auto parts maker and former
subsidiary, out of bankruptcy.
Highland, the second-largest shareholder in Delphi, sent a letter to the company's board that calls a competing restructuring proposal from a private equity consortium a "sweetheart deal," designed to enrich the firms at the expense of common stockholders.
Delphi said Monday that it
struck a deal to receive up to $3.4 billion in capital from a group that includes Appaloosa Management, Cerberus Capital Management and Harbinger Capital Partners Master Fund I, as well as
and UBS Securities.
Highland noted in its letter that the Appaloosa-Cerberus proposal would allow those firms and other "select parties" to purchase $1.2 billion in convertible preferred securities and $200 million in common stock that wouldn't be available to other equity holders, in addition to any unsubscribed shares from a $2 billion rights offering.
"Highland believes this inside deal would give Appaloosa and Cerberus disproportionate equity ownership at the expense of current stockholders and would immediately deliver a value transfer of approximately $1 billion to the Appaloosa and Cerberus group," said Highland in the letter.
"Certain debt holders would also receive cash and equity worth more than 100 cents on the dollar, also at the expense of common stockholders. In addition, Appaloosa and Cerberus would have effective control of the board through their right to name six of the 12 directors of Delphi, including the board's chairman."
Highland, which owns 8.9% of Delphi's shares, portrayed its proposal as a deal that "allows participation by all equity holders through a rights offering and will promote good and independent corporate governance for the company."
It noted that its proposal would preserve an existing arrangement between Delphi and GM. Highland would buy any unsubscribed shares in the $4.7 billion rights offering and receive a fee of 2.5% of that offering.
All existing stockholders with more than 0.5% of the common shares would have the right to purchase any unsubscribed shares in the rights offering under its proposal, with no preferred stock offering. Holders of subordinated debt claims would be paid in full in cash.
The hedge fund could win support among other Delphi stakeholders who are dissatisfied with the Appaloosa-Cerberus plan, and that could set the stage for a fight.
A Delphi spokeswoman declined to comment. The company was filing motions seeking approval of the first deal with the U.S. bankruptcy court of the Southern District of New York and the
Securities and Exchange Commission
this week. A court hearing for the plan was set for Jan. 5.
Highland said that timeframe is not sufficient to allow Delphi's board of directors to properly consider "a proposal of this complexity and magnitude." It plans to file its opposition to the Appaloosa-Cerberus deal on Jan. 2, and it called on Delphi to consider its proposal "in an orderly and contemplative fashion consistent with the board's fiduciary duty to exercise due care."
Delphi's bankruptcy proceedings have so far been a long, complicated drama involving the company, its shareholders, creditors, the United Auto Workers union and the world's largest auto manufacturer, GM.
GM's fortunes are closely tied to Delphi's survival, since its own financial health depends on a steady flow of parts to its manufacturing plants. It has been a major player throughout the bankruptcy process, shouldering much of the financial burden and trying to broker a deal in the heated negotiations between Delphi and the United Auto Workers union over salaries and benefits.
Some investors view Delphi as a deep value play, since some of its operations remain highly profitable.
"If it could lower the burden of its cost structure and divest itself of the unprofitable businesses, investors could come away with a very healthy company," says Erich Merkle, an analyst with consulting firm IRN.