DCX reaches deal with Cerberus

By From freep | May 15 2007
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In a deal to end nine unhappy years of marriage between Chrysler and Mercedes, DaimlerChrysler AG announced early this morning that it had picked private equity firm Cerberus Capital Management to take a majority ownership in the Auburn Hills-based automaker.

Cerberus, a New York City fund with several ties to the auto industry already, will pay $7.4 billion for an 80% stake in the maker of Chrysler, Dodge and Jeep brand vehicles.

DaimlerChrysler AG plans to change its name to Daimler AG, focus on its Mercedes luxury brand, and retain about 20% of Chrysler, the company announced.

“We're confident that we've found the solution that will create the greatest overall value – both for Daimler and Chrysler,” DaimlerChrysler chief executive Dieter Zetsche said in a statement this morning. “With this transaction, we have created the right conditions for a new start for Chrysler and Daimler.”

Of the $7.4 billion Cerberus is spending on the transaction, $5 billion will go into the newly created Chrysler Corp. LLC and $1.05 billion will go into Chrysler Financial Services “to strengthen the equity base of both businesses.”

Daimler will give the new Chrysler a $400 million loan.

Chrysler pension and health care liabilities will stay with Chrysler, DaimlerChrysler said.

Through the deal, Daimler will receive $1.35 billion.

The Cerberus bid, which emerged as the front-runner over the weekend, beats out bids from Canadian auto supplier Magna International Inc. and private equity firm Blackstone Group.

Kirk Kerkorian, who tried to buy Chrysler in the 1990s, also made a public bid of $4.5 billion in April but his offer was apparently frozen out because of his contentious past with DaimlerChrysler.

DaimlerChrysler's management board approved the deal with Cerberus today and it still requires the company's supervisory board, the equivalent to a U.S. company's board of directors, to sign off on it.

The deal also requires regulatory approval. DaimlerChrysler expects the deal to be finalized this fall.

In a surprising twist, DaimlerChrysler's announcement included a statement from UAW President Ron Gettelfinger showing support for the deal.

"The transaction with Cerberus is in the best interests of our UAW members, the Chrysler Group and Daimler," Gettelfinger said in the statement.

A member of DaimlerChrysler's supervisory board, Gettelfinger had argued in favor of keeping the company together.

DaimlerChrysler's announcement, made at 4:31 a.m., comes nine years after Daimler-Benz AG and Chrysler Corp. united at the cost of around $36 billion in what at the time was called a “marriage made in heaven.”

It was an uneven marriage to begin with between luxury car and mass-market car makers that never developed into a true meshing of synergies as promised.

German shareholders eventually grew unhappy, especially after Chrysler posted its losses in the third quarter of last year. In 2006 Chrysler's posted an operating loss of $1.5 billion, a number recently restated to $680 million because of accounting changes.

At the stockholders' annual meeting in Berlin last April, the message was clear: Divorce. @@page@@

U.S. workers were shocked Feb. 14 when DaimlerChrysler chief executive Dieter Zetsche indicated that Chrysler might be for sale when he said all options were on the table for the Chrysler Group.

It came on the day when Chrysler was announcing its second major turnaround plan in the past decade, a plan that intended to cut jobs and production and reposition the company for growth.

The announcement ignited worldwide speculation about Chrysler and who would want to buy the unit that's known for making minivans, the Dodge Ram and Jeep Grand Cherokee.

Rumors and speculation swirled as DaimlerChrysler executives insisted on saying only that all options were on the table.

A new alliance with General Motors Corp. first popped up as a possibility.

As the Free Press reported earlier this year, the Detroit automaker had talks with DaimlerChrysler officials late last year and in January about the potential of a deal to take Chrysler off the Germans' hands in exchange for less than a 10% of stake in GM and Daimler's support of future health care liabilities.

DaimlerChrysler officials, however, figured they could get a better deal from the market, in particular private equity firms, which recently have been buying up struggling auto industry players.

Cerberus Capital Management, named after the mythical three-headed dog that guards the gates of Hades, is one of those private equity firms buying up auto businesses.

Last year it finalized a deal to take 51% of GMAC, General Motors' financing arm, and among its other holdings are banks, mortgage companies, property managers, Alamo and National rental car companies, more than 250 Burger King restaurants, the Fila shoe brand, Blue Bird school buses and the Rafaella clothing brand.

In Michigan, Cerberus has recently collected automotive assets beyond GMAC, including auto suppliers CTA Acoustics in Madison Heights and GDX Automotive in Farmington Hills.

It is also working to buy bankrupt Novi-based auto supplier Tower Automotive for $1 billion.

Most analysts agree that any buyer will need dramatic concessions from the UAW in order to make a deal work.

The unions have voiced their strong opposition to private equity firms in the auto business.

Canadian Auto Workers union President Buzz Hargrove has said he would opposes private equity firms.

The CAW voiced its lone support for Magna, saying it was the only potential bidder that would grow the company.

Before today, the UAW's Gettelfinger never said which of the bidders he preferred, rather he had consistently said he wanted to keep DaimlerChrysler together.

The UAW has already taken some blame from analysts for DaimlerChrysler's decision to sell Chrysler.

Zetsche has been vocal about his frustration with the UAW for not giving Chrysler the same kind of health care concessions it gave Ford Motor Co. and General Motors.

Gettelfinger has said the union was never presented with financial information that showed Chrysler was going lose money in 2006. DaimlerChrysler as a whole made $5 billion in net profit last year.

It's been estimated that the U.S. division has nearly $20 billion in pension and health care liabilities.

In March, Lehman Brothers analyst Brian Johnson said that the number of Chrysler job cuts could grow to 25,000 if a private equity firm buys Chrysler. Experts have said that any deal is likely to involve a bidder wanting health care concessions from the UAW.

Magna emerged in recent weeks as a perceived frontrunner among analysts in large part because the perception that organized labor would back a Magna offer.

The ace in Cerberus' hand appears to have been the hiring of former Chrysler Chief Operating Officer Wolfgang Bernhard as an adviser to help the deal.

Bernhard, who helped orchestrate the previous turnaround plan at Chrysler, has been seen around Chrysler's headquarters in Auburn Hills and seemed to be favored by Chrysler executives over other bidders.

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