Tower Automotive Inc. (OTC:TWRAQ) received a $1 billion buyout offer from Cerberus Capital Management to take it out of Chapter 11 bankruptcy protection. The company would be the latest in a series of automotive takeovers by private equity, which have included Delphi and DaimlerChrysler. The term sheet submitted to the U.S. Bankruptcy Court indicated that the Cerberus offer would pay off all of the outstanding obligations to debtors, pay off Tower's pensions, and provide "certain recovery" for unsecured creditors. These unsecured creditors would get $10 million in cash under a reorganization plan while Cerberus would put aside another $2 million in a liquidating trust for the unsecured creditors. The process would also allow for competitive bids; however, the bidding procedures would be $10 million above Cerberus' initial offer and will raise in $5 million increments, which is somewhat high for a bankruptcy auction. Consequently, it is likely that the Cerberus offer will be the final offer, especially considering the fact that many of the other large private equity firms that would compete have already taken stakes in other automotive companies.

Meanwhile, the company's common stock shareholders pushed the OTC shares up nearly 100% on the news until it settled at $0.06. It is uncertain as to whether or not common stock shareholders will be able to partake in the $10 million set aside for unsecured creditors. Remember, unsecured creditors include not only common stock shareholders but also preferred stock shareholders, trade creditors, and many others. Currently, the OTC shares price the company's common stock value at $3.92 million, indicating an assumption that almost 40% of the $10 million payout will be distributed to common stock shareholders. Will this happen? While nothing is certain, it is unlikely that this much will be set aside since there are many other unsecured creditors that must be paid off. Regardless, this development is certainly worth following as private equity continues to aggressively take over the auto sector.

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