Cerberus to buy majority of Chrysler for $7,4bn
Private equity firm Cerberus will buy the majority of DaimlerChrysler’s struggling Chrysler Group for $7,4-billion, a fraction of the $36-billion deal that created the transatlantic car union nine years ago.
Cerberus Capital Management gets an 80,1% stake in Chrysler and its related financial services business, DaimlerChrysler said on Monday, ending what was billed as a marriage made in heaven but never lived up to the name.
The deal, months in the making, puts a major United States automaker in the hands of a private equity group for the first time.
“Cerberus is the right strategic buyer for Chrysler, with a long-term commitment to Chrysler’s growth and success. They are committed to working constructively with both union leadership and Chrysler’s management team to help Chrysler realise its full potential,” Chrysler president Tom LaSorda said.
The deal will not trigger any job cuts beyond the 13Â 000 Chrysler announced in February, when it unveiled a $1,5-billion 2006 operating loss as customers, spooked by high fuel prices, fled its line-up of pickup trucks and sport utility vehicles.
The deal breaks up a product line-up that yoked American mass-market brands Jeep, Dodge and Chrysler with Germany’s premium Mercedes-Benz, luxury Maybach and Smart mini-car brands at a time of wrenching restructuring for the US auto industry.
The accord calls for Chrysler to retain billions of dollars in pension and healthcare obligations for its workers and will result in a net cash outflow of â,¬0,5-billion ($677-million) for DaimlerChrysler, now the world’s fifth-biggest carmaker.
The German company—whose name will revert to Daimler AG if shareholders approve—will contribute another â,¬650-million to cover long-term liabilities at Chrysler, it said.
It estimated the deal will cut DaimlerChrysler’s 2007 net profit by â,¬3-billion to â,¬4-billion.
DaimlerChrysler stock rose as much as 7,8% on the news and was up 4,3% at â,¬63,24 by 11.25am GMT, by when more than three times a normal day’s volume had traded.
“Even though I don’t think there is a very strong valuation story, there is a very strong visibility story. One of the great parts of uncertainty surrounding Daimler is now not so uncertain,” said Nomura analyst Michael Tyndall.
Union welcomes deal
Dismayed by its volatile earnings, DaimlerChrysler put Chrysler up for sale in February.
Bidders that publicly said they were vying for Chrysler are Kerkorian’s Tracinda and Canadian parts maker Magna International. Private equity firm Blackstone Group also pursued Chrysler, and was said to be linked up with smaller buyout firm Centrebridge Partners.
New York-based Cerberus is a private investment fund that has built a huge private equity and hedge-fund practice. It hired Wolfgang Bernhard, who helped turn Chrysler around early this decade, as an adviser on the deal.
One key to the deal is the company’s unfunded healthcare liabilities related to Chrysler’s contracts with its United Auto Workers-represented factory workers. These stood at around â,¬14,1-billion at the end of last year.
DaimlerChrysler said Chrysler would keep the liabilities.
UAW President Ron Gettelfinger, who sits on DaimlerChrysler’s supervisory board and had publicly opposed a sale to a private equity buyer, hailed the deal.
“The transaction with Cerberus is in the best interests of our UAW members, the Chrysler Group and Daimler,” he said.
Chrysler aims to return to profits in 2008. A main hurdle, analysts say, is its ability to clinch a new contract with the UAW that reduces costs, particularly for healthcare, when the current contract expires in September.
“That unfunded healthcare really determines how much the business is worth,” Nomura’s Tyndall said, noting Bernhard, who used to be Chrysler’s chief operating officer, was as well placed as any to have a clear view of this.
Cerberus has experience with the auto industry. General Motors sold a 51% stake in its financing arm, GMAC, to a consortium led by Cerberus in a deal worth about $14-billion last year.—Reuters