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A private equity firm could cut at Chrysler

From freep| March 30,2007

DaimlerChrysler AG, concerned about the fate of Chrysler workers, may lean toward selling the U.S.-based unit to what is deemed as a labor-friendly private equity buyer, which would still possibly seek to cut 25,000 jobs, a leading brokerage said Tuesday.

A Lehman Brothers analyst joined a growing chorus of auto industry experts saying any potential buyer for Chrysler Group will need organized labor's help to make a deal work.

Chrysler Group, which lost $1.5 billion last year, already has announced plans to cut 13,000 jobs in the next three years in hopes of returning to profitability.

Lehman Brothers analyst Brian Johnson said that number could grow to 25,000 and the plan could include health care concessions from U.S. autoworkers.

Johnson outlined five possible outcomes for Chrysler, including DaimlerChrysler's supervisory board deciding to keep the Auburn Hills-based unit.

"Given DCX AG's potential aversion to a labor-unfriendly buyer and to an asset sale, we view as more likely a sale to a private equity buyer, which promises a more conciliatory approach to labor (potentially gaining the support of the UAW prior to making the bid)," he told investors in a note Tuesday.

"This potential buyer would likely seek to gain some additional concessions from the UAW beyond the Project X restructuring plan, principally deeper buyouts and hourly workforce cuts."

Just last week, Jerry York, the former Chrysler Corp. chief financial officer and General Motors Corp. board member, said in a speech in Detroit that a potential buyer would need to forge a relationship with the UAW.

"The numbers are up for speculation," said Gerald Meyers, University of Michigan business professor and former chairman of American Motors Corp. "But I have no doubt that there will be a bloodbath."

He doubts it is possible to get the unions on board with a private equity buyer. Canadian Auto Workers President Buzz Hargrove has told the Free Press he objects to such a suitor, and UAW President Ron Gettelfinger has said he's working to prevent a sale.

Should a labor-friendly offer not work, Johnson said, the company may turn to GM. The Free Press reported earlier this week that Chrysler's cross-town rival had talked with DaimlerChrysler in January about a potential transaction but that GM is not actively pursuing a purchase.

In what could be seen as another roadblock to a GM-Chrysler merger, Bear, Stearns & Co. Inc. said Tuesday that such a deal could run into trouble with U.S. antitrust laws.

"We think an outright GM-Chrysler merger would be challenged to pass antitrust scrutiny," analyst Peter Nesvold told investors in a note.

He added: "The unified company would probably have to divest some (or all) of Chrysler's truck assets for antitrust reasons -- an unattractive consequence based on trucks' disproportionate variable profitability."

While DaimlerChrysler might lean toward a labor-friendly buyer, Johnson said an aggressive private equity buyer likely would negotiate to an impasse on a new labor contract with the UAW this year, "then impose a new contract with labor costs around $25 per hour (paid either to UAW workers or permanent replacements.)"

He added, "The buyer would also likely eliminate all retiree health benefits ... potentially by suing retirees in a circuit with favorable precedent."

Canadian auto supplier Magna International Inc. reportedly has joined with an unnamed private equity firm to offer between $4.6 billion and $4.7 billion for Chrysler, one of Magna's largest customers.

Big-name private equity firms Blackstone Group and Cerberus Capital Management are both expected to make offers.


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