TRAVERSE CITY, Mich. -- Without firm financing for his proposed $4.4 billion hostile acquisition of Dana Corp., ArvinMeritor CEO Larry Yost is fighting a battle against time.
The longer it takes him to line up banks willing to finance the merger, the harder it will be for Yost to win over investors, skeptical bond analysts and auto industry opinion leaders.
Few industry people here last week saw much magic in the merger.
Some Wall Streeters say Yost's promised savings from synergies in a merger -- approximately $200 million annually - would be small potatoes for a $16 billion company. Such a figure could easily be swamped by the increase in interest expense for the acquisition.
And some auto executives question whether a hostile takeover would poison the post-merger company's corporate culture.
"There's an awful lot of animosity between the two management teams," said Mark Frissora, chairman of Tenneco Automotive of Lake Forest, Ill. "If a merger were to happen, it could be a difficult situation to contend with."
Frissora made his comments during the annual conference in Traverse City co-sponsored by the Center for Automotive Research of Ann Arbor, Mich., and the University of Michigan.
Frissora -- one of Yost's major competitors -- is not entirely objective. But other luminaries equally are skeptical. For a supplier to assume more debt now is a "very dangerous thing to do," said Center for Automotive Research Chairman David Cole, who organized the conference. "The debt that would be created by such a merger makes it a nonstarter."
A merger would create the world's seventh largest automotive supplier. With annual sales of $7.3 billion, Ar-vinMeritor is slightly smaller than Dana, whose revenues last year totaled $9.7 billion.
Dana, based in Toledo, Ohio, makes truck frames, driveshafts, brakes and engine parts. ArvinMeritor, of Troy, Mich., produces sunroofs, suspension components, door modules and exhaust systems. Both companies make truck axles and aftermarket components.
Yost's proposed merger runs into criticism over debt. Yost's original proposal was to pay $15 per share for Dana's stock. That would require raising $2.2 billion in cash to finance the acquisition. ArvinMeritor also would have to assume an additional $2.2 billion in Dana debt.
That would leave ArvinMeritor with a debt-to-capital ratio of 88 percent, one of the industry's highest debt levels.
And Yost may have to raise his bid to persuade Dana shareholders to tender their shares. If the purchase price rises to $20 per share, ArvinMeritor would have to pay about $3 billion.
But investors appear skeptical that the merger will be consummated.
After Yost announced his bid on July 8, Dana's stock rose to $16.20 per share, up from $12.02 the day before. Since then, the stock has drifted back down to $15.
Wooing Wall Street On Thursday, Aug. 7, an ArvinMeritor spokeswoman said Yost is in final discussions with his banks about how to structure the debt to finance the purchase.
By combining the two companies, Yost says he can cut costs by $200 million annually. Wall Street is not impressed.
Assuming that the acquisition will be fully financed by debt, interest payments alone could exceed Yost's projected savings.
The $200 million figure "is a pretty small number for a $16 billion company," said George Meyers, an analyst for Moody's Investors Service, a credit rating agency in New York. "You'll have a bigger company, but it's not clear to me that it's what you need to succeed."
Moody's credit rating for ArvinMeritor is Baa3, the agency's lowest investment-grade rating. Standard & Poor's gives ArvinMeritor a rating of BB+, one level below investment grade.
ArvinMeritor's credit ratings are higher than those of some other suppliers. The whole sector is unpopular on the street. The Dana acquisition probably would trigger a downgrade.
Gimme Credit, a bond analysis company in New York, bluntly criticizes the deal. In a July 9 report to investors, analyst Carol Levenson called the proposed merger "a credit nightmare waiting to happen."
Levenson's report listed the negatives: Dana and ArvinMeritor already have high debt; the economic environment is unpredictable; and the hostility of the takeover would complicate the companies' integration.
Some Wall Streeters are waiting to see the final deal before they pass judgment, but investors appear cautious.
As Merrill-Lynch analyst John Casesa noted in his July 9 report: "We believe Dana will fight tooth and nail to remain independent."
Automotive News staff reporters Gail Kachadourian, Ralph Kisiel and Richard Truett contributed to this report