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Magna out front in bid to buy Chrysler Group, analysts say

From Business Reporter | May 01,2007

Magna International Inc. is the top contender for the North American operations of DaimlerChrysler AG and could take a much larger stake in the ailing auto maker than indicated earlier, according to a U.S. investment firm.

KeyBanc Capital Markets said yesterday that Aurora-based Magna could take a direct minority ownership stake of between 25 per cent and 50 per cent of The Chrysler Group.

"Many industry sources indicate Magna is the leading contender for Chrysler," KeyBanc analyst Brett Hoselton said in a note to clients.

Hoselton said KeyBanc believes Magna and partner Onex Corp. will value the Chrysler Group in the "mid to high $5 billion (U.S.) range," above an earlier estimate of $4.6 billion to $4.7 billion.

In addition to a higher Magna stake, Toronto-based Onex would hold 40 to 65 per cent and German-parent DaimlerChrysler would retain 10 per cent, Hoselton said in the note.

However, he cautioned that the sale is dependent on DaimlerChrysler, the United Auto Workers, Magna and Onex Corp. agreeing on details.

"Timing and completion of a deal are uncertain," Hoselton added.

None of the companies would comment on the latest report.

Last week, Magna chair Frank Stronach told the Toronto Star his company hoped Onex would become Magna's partner, but would consider other equity firms in a group to buy Chrysler.

Stronach said it would take another few weeks before Magna, the world's third biggest auto parts maker, could complete a partnership group. Magna's board has not considered any proposals or bids yet, according to one insider.

Stronach, who controls Magna, has also insisted the company would only take a minority stake to avoid competing directly with other major customers General Motors, Ford and Toyota.

Other industry watchers say Magna has an advantage over other bidders because it is an industry player, while large equity firms would shrink the company by selling or closing some operations and then unload it again. Parent DaimlerChrysler also wants any buyer to limit job losses.

In the note, Hoselton said resolution of a key issue regarding responsibility for billions of dollars in Chrysler pension and health-care obligations is also uncertain.

"Scenarios include retainment by Chrysler or placement into a separate entity (independent from Chrysler or DaimlerChrysler)," he said. "We believe both scenarios include DaimlerChrysler retaining some responsibility for the liabilities."

Last month, KeyBanc indicated Magna's direct involvement was unlikely since a $4.7 billion bid would be lower than contenders such as U.S.-based equity firms Cerberus Capital Management and Blackstone Group.

But Hoselton said conversations with many industry sources show there have been changes in the pursuit of Chrysler, including the position of the United Auto Workers, who represent thousands of company employees in the U.S.

"The UAW now views Magna as its best chance to secure jobs, is amenable to (Magna's) direct involvement in Chrysler and vehemently opposed to the sale of the auto maker to a stand-alone private equity firm," he said.

Hoselton also revealed the UAW has "actually approached" Magna with a "framework concession package" to make the purchase easier. The package would include concessions on wages, benefits, pensions, health care and job classifications in exchange for job security and relocation packages.

Stronach has met with leaders of the UAW and the Canadian Auto Workers (CAW) who want DaimlerChrysler to keep the money-losing North American operations.

But CAW president Buzz Hargrove, who represents about 11,000 Chrysler workers in Canada, said he knows the UAW has not offered concessions. At the same time, he's declined comment on his union's discussions with Magna.

Hoselton, whose firm is maintaining a "hold" rating on Magna, said the company could realize material cost savings, better utilization of parts operations, exclusive business for Chrysler models and lower labour expenses by taking a stake in the auto maker.

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