Chrysler loan problems spook hedge funds; Tribune deal on track; health care sector sees more consolidation

By Evan Weinberger

New York, July 25 - On a day of wildly flailing stock indexes, news that bankers were forced to delay a $12 billion deal linked to the private equity takeover of the struggling Chrysler Co. from DaimlerChrysler AG drove home the fragility of the credit market.

"I think it's just getting harder to borrow money," one market source said. "I don't think there's any question about that."

According to wire reports, bankers have been unable to find backers for the loans because of skittishness in the debt markets over subprime mortgages, and now prime mortgages. A report in The New York Times Wednesday said lenders are seeing an increase in mortgage defaults among borrowers once considered safe.

Even in the face of the skittishness, DaimlerChrysler and Cerberus Capital Management, the private equity firm that agreed to buy one of Detroit's big three for $7.4 billion earlier this year, said that the deal would keep going on schedule.

One sure sign of overall nervousness in the markets, analysts said, has been the recent wild fluctuations in the Dow Jones Industrial Average and the Nasdaq, with record highs followed by seemingly bottomless lows. Tuesday was a microcosm of that. The market started strong, rising as much as 60 points, then dropped 25 points after the poor housing numbers were announced at 10 a.m. ET. That was followed by a somewhat bumpy rally.

In the end, the Dow ended the day up 68.12, or 0.5%, to finish at 13,785.07. The Nasdaq followed the pattern, finally ending at 2,648.17, a gain of 8.31 points, or 0.31%.

Chrysler could signal LBO problems

The Cerberus deal to buy Auburn Hills, Mich.-based Chrysler was notable for being the first time that a private equity firm made a move into automakers, not to mention its large size. The deal was heavily trumpeted and was seen as a positive sign for the future of private equity.

Investors not ponying up the money needed for the loans linked to the sale may be a harbinger of tougher times ahead for private equity.

"Future deals are certainly in jeopardy and everyone's adjusting their risk accordingly," one market source said.

JPMorgan has agreed to keep $10 billion of the debt on its books, and Citigroup Inc., Morgan Stanley, Bear Stearns Cos., Toronto-Dominion Bank, and the Royal Bank of Canada are also a part of the deal. Stuttgart-based DaimlerChrysler is on the hook to find the other $2 billion necessary for the loan.

"The deal's going to get done. It's just the banks are gonna get stuck with this debt," the market source said.

DaimlerChrysler stock was up $3.57, or 3.99%, to close at $93.02 despite the loan-financing delay.

Already there are rumors floating that Citigroup may be having second thoughts on financing private equity firm Terra Firma's $5 billion bid for British record producer EMI Group. That is raising more red flags with investors.

"Private equity is basically saying you signed this deal with us, get it done," the market source said. But if the banks stop getting the deal done, he added, private equity could be in trouble.

The EMI deal is being seen as the canary. "That could send a bad signal," the source said.

EMI shares were down in London nearly 8% Tuesday.

In other private equity takeover news, the Tribune Co. said that its takeover by real estate tycoon Sam Zell is on track. Stock in Chicago-based Tribune (NYSE: TRB) rose $1.03, or 3.79%, to $28.20, still well below Zell's purchase price of $34 per share.

But hedge funds are starting to look at big takeover deals warily, the market source said.

"No one wants to be the hero," the source said. "Most hedge funds are playing and focusing on their monthly returns. No one wants to get caught in one of these blowups."

More health care consolidation

Tuesday was a big day for mergers in the health care and medical field.

Dade Behring Holdings, Inc. agreed to a merger with Siemens Medical Solutions, an arm of Siemens AG, that will make the Deerfield, Ill.-based clinical diagnostics firm a fully-owned subsidiary of the European engineering colossus.

Under terms of the deal, Siemens will offer $77 per share in cash for Dade Behring, an approximately 38% premium to Dade Behring's closing share price of $55.91Tuesday.

The deal is expected to close within three to sixth months.

"Combined, Dade Behring and Siemens will have the potential to become uniquely positioned as the largest provider of clinical diagnostic products and services in the world," Dade Behring president and chief executive officer Jim Reid-Anderson said in a statement.

At the same time, Siemens agreed to sell its VDO auto parts unit to Hannover, Germany-based Continental AG for $7 billion.

Dade Behring stock (Nasdaq: DADE) soared $18.35, or 32.82%, to finish at $74.26. Stock in Munich-based Siemens (NYSE: SI) didn't react as well, dropping $7.86, or 5.44%, at $136.70.

And PRA International agreed to be acquired for $790 million by private equity firm Genstar Capital, LLC. Genstar already owned 12.8% of existing PRA stock.

PRA shareholders will garner $30.50 per share, a 13% premium on the Reston, Va.-based clinical research organization's Tuesday closing stock price of $26.96.

PRA chairman Armin Kessler said the merger was in the best interest of PRA and its shareholders.

"We are pleased that this transaction appropriately recognizes the value of PRA as one of the world's leading global CROs while providing our stockholders with an immediate cash premium for their investment in PRA," he said in a press release.

PRA does have a 50-day window to listen to third-party bids for the company and would a $7.9 million breakup fee to Genstar should a better offer come knocking. The deal is expected to close in the fourth quarter.

PRA stock (Nasdaq: PRAI) moved steadily up over the course of trading Tuesday, closing $2.10, or 7.79% higher at $29.06.

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