Daimler sheds Chrysler to private equity firm

15/05/2007 05:28

By Michael Shields and Kevin Krolicki

FRANKFURT/DETROIT (Reuters) - DaimlerChrysler AG shed most of its stake in the money-losing Chrysler Group by agreeing to pay a $1.55 billion (783 million pounds) sweetener to clinch a deal for a private equity firm to take over the U.S. automaker.

The deal, which marks the first time a Big Three U.S. automaker will be run by a private equity company, requires new owner Cerberus Capital Management to contribute more than $6 billion to shore up the balance sheet of the struggling automaker and its finance arm.

Daimler agreed to kick in $1.55 billion, or 1.15 billion euros (786 million pounds), to Chrysler in order to exit a nine-year-old merger that had failed to deliver on its promise to create a global automotive powerhouse.

.....continued below

Advertisement starts

Advertisement ends

"We obviously overestimated the potential for synergies," said Dieter Zetsche, chief executive of DaimlerChrysler. "Experience has shown us there is potential in working together but given the very different nature of our original markets ... those synergies are limited."

Daimler paid $36 billion to acquire Chrysler in 1998, when it intended to marry mass-market brands like Jeep with luxury brands like Mercedes.

Under the terms of the unwinding, Cerberus Capital Management gets an 80.1 percent stake in Chrysler and its related financial services business.

The deal won a cautious endorsement from Chrysler’s main union, the United Auto Workers, surprising Wall Street analysts. Shares of DaimlerChrysler, General Motors Corp. and Ford Motor Co. all gained in reaction to the deal on Monday.

Chrysler Chief Executive Tom LaSorda said the deal would not trigger job cuts beyond the 13,000 Chrysler announced in February, when it unveiled a $1.5 billion 2006 operating loss as customers, spooked by high fuel prices, abandoned gas-guzzling pickup trucks and sport utility vehicles.

Of Cerberus’ $7.4 billion (5.5 billion euros) commitment, $6.05 billion (4.5 billion euros) will be put into Chrysler -- $5 billion (3.7 billion euros) into auto operations and $1.05 billion (800 million euros) into its finance arm.

Cerberus will pay $1.35 billion (1 billion euros) to Daimler, which in turn is loaning $405 million (300 million euros) to Chrysler.

The German company -- whose name will change to Daimler AG if shareholders approve -- will contribute $880 million (650 million euros) to cover long-term liabilities at Chrysler.

It also agreed to transfer Chrysler’s auto business free of debt, saying that would mean a net cash cost of $680 million, or 500 million euros, from the sale.

Daimler estimated the deal would cut DaimlerChrysler’s 2007 net profit by $4 billion to $5.4 billion -- 3 billion to 4 billion euros.

Cerberus Chairman John Snow -- a former U.S. treasury secretary -- said Chrysler would benefit from dropping out of the public spotlight for a time.

"Our approach is fundamentally long term. We don’t think about the next quarter. We don’t think about what analysts have to say about us," he told a news conference in Stuttgart. "Our capital is patience."

Zetsche said the deal ensured Chrysler’s future while eliminating risks for Daimler.

The deal breaks up a product lineup that paired American mass-market brands Jeep, Dodge and Chrysler with Germany’s premium Mercedes-Benz, luxury Maybach and Smart minicars.

"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

Bidders that publicly said they had been vying for Chrysler are Kirk Kerkorian’s Tracinda Corp. and Canadian auto parts maker Magna International.

Private equity firm Blackstone Group also pursued Chrysler, and was said to be linked up with smaller buyout firm Centerbridge 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, but Snow said Bernhard would not play an active management role there again.

UAW President Ron Gettelfinger, the only U.S. labour representative who sits on DaimlerChrysler’s supervisory board, had first opposed a sale to a private equity buyer.

But Gettelfinger said Zetsche and LaSorda summoned him to Daimler headquarters in Stuttgart on Saturday to say that the Cerberus deal was done and to explain its rationale.

"We are going to work with the situation we find ourselves in today," he told reporters. "Based on everything we heard, we were comfortable enough to say we support this decision."

Chrysler aims to return to profit in 2008. A major hurdle, analysts have said, is whether it can clinch a new contract with the UAW this summer that costs, particularly for health-care and retirement benefits.

DaimlerChrysler said the new Chrysler would keep retirement obligations it estimated at 14.6 billion euros ($19.7 billion) as of the end of 2006.

JP Morgan analyst Himanshu Patel said the terms of the Cerberus deal suggested Chrysler’s new owners had a sense from union leadership of "the scope of possible concessions" in upcoming contract talks.

Canadian Auto Workers President Buzz Hargrove, who represents about 10,000 Chrysler workers, said he would press Cerberus to guarantee that there will be no further job cuts at Canadian plants through September 2008.

Cerberus has experience with the auto industry. General Motors Corp. sold a 51 percent stake in its financing arm, GMAC, to a consortium led by Cerberus in a deal worth about $14 billion last year.

JP Morgan advised Chrysler and Goldman Sachs advised Cerberus, a source familiar with the situation said. The banks declined comment.

(Additional reporting by Knut Engelmann and Hans Nagl in Frankfurt, Hendrik Sackmann in Stuttgart, Megan Davies and Michael Flaherty in New York, Ben Klayman in Chicago and Poornima Gupta in Detroit)