Debt load derails Hayes Lemmerz

Acquisitions, module plan led to Chapter 11

Big spender
Hayes Lemmerz acquisitions


  • 1997: Lemmerz Holding GmbH; steel wheel business of Bosch

  • 1998: Mexican truck wheel maker Min-Cer

  • 1999: CMI International Inc.

  • DETROIT — Like many auto supplier executives, Ron Cucuz, former CEO at wheel maker Hayes Lemmerz International Inc., believed supplying modules rather than individual components was the strategy that made sense.

    At a gathering in New York of Wall Street investors in 1999, Cucuz laid out his strategy of acquisitions aimed at turning Hayes Lemmerz into a supplier of corner modules — wheels, suspension, brakes and hubs.

    But one piece was missing. According to one participant, an investor asked Cucuz: “How much business are you getting from the new strategy?” His answer: “None.” Investor: “Why?” Answer: “Our customers are not embracing this concept as quickly as we are.”

    While automakers have adopted modules in areas such as interiors and fuel systems, they have been slow to buy complete corner modules. Weighed down by the debt from acquisitions, the world’s largest wheel maker on Wednesday, Dec. 5, filed for Chapter 11 bankruptcy protection from creditors while it reorganizes. The company said in the filing it has $2.8 billion in assets and $2.65 billion in debts.

    Suppliers swamped by debt

    Hayes Lemmerz, of Northville, Mich., is the latest example this year of an auto parts maker swamped by a highly leveraged balance sheet from expensive acquisitions during the 1990s. Other big suppliers seeking bankruptcy protection this year include Federal-Mogul Corp., A.G. Simpson Co. Ltd., Mexican Industries in Michigan Inc. and Talon Auto Group Inc.

    Suppliers carrying a lot of debt are being squeezed by limited access to capital in a declining economy and constant price cuts demanded by automakers.

    For Hayes Lemmerz, it was excessive debt along with declining market conditions that prompted the company to file for bankruptcy protection, says Curtis Clawson, who replaced Cucuz as CEO in August. Cucuz could not be reached for comment.

    Clawson said Hayes Lemmerz’s primary problem was generating revenue to service the bond debt. He said the company didn’t miss any payments, but slow auto sales put it in a position where it was getting difficult to make the payments and run the business.

    “Our problems date back to a couple of expensive acquisitions,” he said. “We bought the companies at peak market price and at high multiples. That debt service has become increasingly difficult since volumes have dropped.”

    High-priced acquisitions

    A lot of Hayes Lemmerz’s cash was used for bulking up. Cucuz’s biggest acquisition was CMI International Inc., a supplier of aluminum castings for structural components. They were combined with Hayes Lemmerz’s wheels and brake calipers and rotors.

    That provided the basis to offer most of a corner module. CMI’s price tag was steep: $600 million. Cucuz said at the time that the deal would give him $800 per vehicle in parts content.

    But there has been little interest from its biggest customers, including General Motors, Ford Motor Co. and DaimlerChrysler, which accounted for 52 percent of the company’s $2.3 billion in sales last year.

    Investment banker Cliff Roesler says the cost of Hayes Lemmerz’s acquisition strategy meant Cucuz had to earn a premium for combining the wheel with a corner module. Several big suppliers have similar strategies, says Roesler, of W.Y. Campbell & Co. of Detroit, but the Big 3 have yet to embrace it.

    Debt-free competitor prospers

    The Cucuz strategy of debt-financed growth stands in stark contrast to that of competitor Louis Borick, CEO of wheel maker Superior Industries International Inc. in Van Nuys, Calif., who uses profits to pay for growth.

    Borick paid off Superior’s long-term debt in 1996 and now has double-digit net profit margins and more than $100 million cash .

    Hayes Lemmerz’s Clawson says the company’s module strategy is on hold. The company remains profitable, he says, and it will emerge from Chapter 11 as a “stronger, more competitive company than we are today.”

    There may be few alternatives. A buyout from competitor Amcast Industrial Corp. is not considered likely. It has its own financial difficulties.

    As for Superior Industries, Borick believes careful growth will leave him poised to grab more market share should competitors stumble.

    Michael Strong of Crain News Service contributed to this report

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