Chrysler group to be sold for $7.4 billion
DaimlerChrysler said this morning that it would sell a controlling stake in its
U.S.-based Chrysler Group to private equity firm Cerebrus Capital Management
for $7.4 billion, about one-fifth the amount the German automaker paid to
acquire Chrysler in 1998.
The deal, expected to close this fall, would give Cerebrus an 80.1% interest in
a new Chrysler Holdings. DaimlerChrysler, which plans to drop
"Chrysler" from its name to become simply "Daimler" when
the sale closes, would pay out $650 million, partly in a loan to Cerebrus, to
effectively walk away from its American cousin.
The deal would allow the German automaker, parent of Mercedes-Benz, to shed
liability for $19 billion in Chrysler retirement benefits, which would be shouldered
by the new holding company. DaimlerChrysler would hold a 19.9% stake in the new
U.S.
company.
The deal marks the first time a U.S. automaker would be controlled by a private
equity group and ends an auction process that drew interest from several bidders,
including Beverly Hills billionaire Kirk Kerkorian
Although ownership by an equity group had been bitterly opposed by the United
Auto Workers union during the months Chrysler has been on the block, the deal
announced early this morning at Daimler headquarters in Stuttgart, Germany, was
backed by UAW President Ron Gettelfinger.
He said the sale was "in the best interests" of the union and both
automakers. Union members and management of the new Chrysler would be able to
"focus entirely on the development and production of quality
products," Gettelfinger said.
As for Daimler, shedding at least some of the responsibility for Chrysler's
financial woes "will allow them to refocus on what they're good at --
producing luxury cars," said Jesse Toprak, an analyst with online auto
data firm Edmunds.com.
Chrysler posted a $1.46-billion loss last year as it continued pumping out its
large pickups and sedans with fuel-thirsty V-8 engines long after soaring gas
prices had damped U.S.
auto buyers' enthusiasm for big vehicles.
The Auburn Hills, Mich.-based automaker has announced plans to cut 13,000 jobs,
or 16% of its workforce, and has fallen to fourth place in the U.S. market
behind Japanese rival Toyota Motor Corp. Like Ford Motor Co. and General Motors
Corp., Chrysler has lost market share to Asian automakers as customers switch
from pickups and sport utility vehicles to more fuel-efficient cars.
"It's going to take a long period of time and a lot of cash" to turn
the company around, said Burnham Securities analyst David Healy. "I wonder
if they're biting off more than they can chew."
Dieter Zetsche, DaimlerChrysler's chief executive and former head of Chrysler,
said the deal "will create the greatest overall value, both for Daimler
and Chrysler."
New York-based Cerberus would put $5 billion into Chrysler's auto making
business and $1.05 billion into its financial services unit and contribute
$1.35 billion of the purchase price to Daimler.
In return, Daimler would shoulder about $650 million in costs, including a
$400-million loan to the new Chrysler.
The deal calls for unspecified, ongoing joint projects of Chrysler and
Mercedes-Benz to continue and for a joint council of management representatives
of the newly separated auto companies to be created to discuss further business
projects.
The sale was prompted by angry DaimlerChrysler investors in Germany, who
saw the combination of the two companies as a nine-year distraction that
watered down the Mercedes-Benz brand's quality and dragged down the value of
DaimlerChrysler's stock.
Daimler is expected to announce Tuesday that its Chrysler unit lost as much as
$1.2 billion in the first quarter because of the costs of its continuing
restructuring.
Chrysler was flirting with insolvency when Daimler bought it but bounced back
under Zetsche's direction with a number of hot sellers such as the Chrysler 300
sedan and Dodge Magnum sport wagon.
Those vehicles used previous-generation Mercedes-Benz components to improve
ride and handling characteristics while retaining a muscular American design
and, at the top of each line, a larger Chrysler-built "hemi" V-8
engine that recalled the glory days of the Chrysler, Dodge and Plymouth muscle
cars of the 1960s and '70s.
Soaring gas prices and an unwillingness to stop building the cars and trucks
that had helped it gain market share in previous years led Chrysler Group into
a calamitous 2006, however. Sales quickly fell and it lost money and market
share, finally surrendering to Toyota
its longtime place as the nation's No. 3 automaker.
Chrysler's present financial slump is its third in the 25 years since
then-Chairman Lee Iacocca rescued the automaker from bankruptcy with a daring
federally guaranteed $1.5-billion loan.
But financial crisis is nothing new to the company, which was formed in 1925
out of the ruins of the Maxwell Motor Corp. Under founder Walter P. Chrysler, a
former GM executive, Chrysler Corp. gobbled up several smaller competitors and
by 1929 became the third-biggest of the U.S. carmakers, behind Ford and GM.
Cerberus is expected to trim wages and reduce pension costs, at least for newly
hired workers, after taking control of Chrysler.
The deal is slated to close around the time the UAW negotiates its new
three-year pact with Ford, GM and Chrysler, a negotiation that is expected to
pit a shrinking union against automakers claiming that expensive pension,
healthcare, wage and working condition agreements of the past have put them at
a cost disadvantage to import brands the build cars in the U.S. in nonunion
factories.
The so-called legacy costs add $1,500 to $1,600 to the price of a vehicle, said
David Cole, director of the Center for Automotive Research outside Detroit.
"There's a lot more healthcare in a car than there is steel," he said.
"Unless they solve this problem, they really face the death of a thousand
cuts. They're not competitive."
Cerebrus bested three other bidders for Chrysler.
Canadian auto parts supplier Magna International Inc. had been considered a
possible buyer on the strength of its relationship with the automaker and two
other private equity firms, Blackstone Group and Centerbridge Capital Partners,
headed a consortium of investors that submitted a bid.
Kerkorian, who acquired a sizable stake in GM only to sell it last year for a
$100-million profit, made a $4.5-billion all-cash offer for Chrysler last month.
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