Delphi Offering Is a Lemon

NEW YORK (TheStreet --Out of bankruptcy and into the portfolios of the public, Delphi Automotive (DLPH) will be selling 20 million shares on the open market.

However, this isn't a typical initial public offering, in which the company is trying to raise money to expand. Instead John Paulson, one of Delphi's largest shareholders, is unloading a large portion of his 22% stake with the plan to reduce his holdings to 15%. It's a $554 million deal with the price of the shares is expected in the $22 to $24 range.

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Delphi has a long, checkered history. The original company began in 1888, but then was folded into General Motors(GM), which was known for making all the parts to its cars. But the parts business was losing money and in 1991 GM began selling portions of the business. It eventually spun out Delphi entirely in 1999, raising $1.7 billion. Delphi acquired another business and then promptly ran into trouble and laid off thousands. In 2004, the company was subpoenaed by the Securities and Exchange Commission for irregular accounting practices and financial transactions. It filed for bankruptcy in 2005. The company continued to close and sell off plants until 2009 when a group of investors purchased the company's core assets. Two years later, a company once identified as the 21st largest producer of air pollution, is available for purchase. Other debt holders including Elliot Management, which owns 13%, Silver Point Capital, which owns 9%, and Oaktree Capital, with a 7.5% stake, are holding on to their shares. Paulson, whose fund performance is down 44%, will still own more than 50 million shares. He was once considered one of the smartest money managers but is now looking a little less invincible. Since 85% of the shares in the offering are coming from Paulson, none of the money raised will actually go to Delphi. Delphi is currently taxed as a partnership and files its taxes in the U.K. But if the IRS decides that Delphi is indeed a domestic corporation, the company could face a big tax bill. (Let's see -- public stock sold in the U.S., incorporated in New Jersey, a chief financial officer based in Michigan ... sounds like a U.S. company).

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Potential buyers may focus on Delphi's product leadership where it has a No. 1 or No. 2 position in many product categories. In 2010, Delphi's products were found in 17 of the top 20 selling cars in the U.S. and in all of the top 20 cars in Europe. It has its eyes set on the Chinese market where it is in only 13 of the top 20 cars. The Chinese market is the largest parts market, bigger than the U.S. or Japan.

Performance for related auto-parts stocks has been dismal. Delphi's original parent General Motors is off 36% this year and other car part companies are down as well -- BorgWarner(BWA) has dropped 7.5% year to date and Lear (LEA) is down 13%. Investors also have to take into account a looming recession in Europe; with the region suffering from a financial crisis, don't expect too many cars to be sold.

On a positive note, Delphi has reduced its dependence on GM, which only accounts for 21% of its revenue. It has also diversified into the commercial vehicle market, which is now 8% of its net sales. --Written by Debra Borchardt in New York.

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