The DaimlerChrysler AG said Monday that it will sell 80.1 percent of its American luxury arm Chrysler Group to private equity firm Cerberus Capital Management LP for $7.4 billion. The deal is aimed at unwinding a troubled 1998 merger that was primarily intended to create a global auto leader.
The lucky suitor
Cerberus, one of the world's leading private-equity firms, has been a prime suitor of Chrysler since the company was up for sale in mid-February. The bid by Cerberus was buoyed by the hiring of Bernhard, who helped lead Chrysler's last comeback during his tenure as chief operating officer from 2001 to 2004.
Bernhard has been joined on the Cerberus team by other auto-industry experts like the former Ford Motor Co. marketing executive Robert Rewey. In addition, Cerberus is said to be working closely with research firm J.D. Power and Associates and its senior vice president Gary Dilts, who previously headed Chrysler's sales staff.
Analysts had previously seen Magna as most potent suitor because of its industrial experience and Stronach's ambitions to be a major player in the global auto industry. "The charm of Magna's bid was that he was someone with a strong vision," said Christoph StÃ?rmer, a Frankfurt-based analyst for the consulting firm Global Insight. "Now he's kind of backing off." Magna is said to have harmed its chances to purchase Chrysler with its surprising announcement this week of an equity tie-up with tycoon Oleg Deripaska.
The divorce
The fast-paced reversal of the $36 billion takeover of Chrysler by DCX that tried to set the mold for global automotive manufacturers is as swift as . It also represents a huge bet for Cerberus, which has agreed to take on billions of dollars in pension and retiree health care costs at Chrysler.
"We're confident that we've found the solution that will create the greatest overall value, both for Daimler and Chrysler," said Chief Executive Dieter Zetsche, who oversaw Chrysler before becoming the DCX CEO last year. "With this transaction, we have created the right conditions for a new start for Chrysler and Daimler," he continued.
DCX shareholders have reacted confidently - sending DaimlerChrysler's shares up over seven percent after the deal was announced. Zetsche added that the two companies would still work together, particularly on existing conventional and alternative drive systems, purchasing, sales and financial services outside North America.
"We very much look forward to our continued cooperation as business partners, as we want to continue to reap the mutual benefits of working together," Zetsche said. "That's one of the reasons why we're retaining a 19.9 percent equity position in Chrysler," he furthermore added. DCX said that the deal is likely to be complete by the third quarter and that it would reduce its overall profit by as much as $5.4 billion for 2007.
The German automaker noted that shareholders must approve changing the company's name to Daimler AG. A vote will likely be scheduled this fall. DCX also said that an affiliate of Cerberus will hold the majority of a new Chrysler Holding LLC, while the company will retain a 19.9 percent stake. Chrysler will keep its heavy obligations for pensions and health care costs, the main issue complicating DCX's effort to sell the division.
The thought of a sale to a private equity firm had bothered unions in the United States because of the firms' propensity to cut costs and jobs. But the United Auto Workers (UAW) President Ron Gettelfinger called it the best choice. Private equity firms usually use money provided by pension funds and evade funds and wealthy private investors to acquire public companies or its parts and take them private. In addition, they reorganize and later sell the company at a profit.
Foreseen aftermath
"The transaction with Cerberus is in the best interests of our UAW members, the Chrysler Group and Daimler. We are pleased that this decision has been made," he said. That was a shift from earlier this year, when Gettelfinger warned that a private equity purchaser would "strip and flip" the company by selling it off in parts. On Monday, Gettelfinger said he was told by Zetsche and Chrysler President Tom LaSorda that keeping it part of the wider company was no longer an option.
"Furthermore the process of selecting the preferred investor for the Chrysler Group was fully explained," Gettelfinger said. "We are satisfied now that the decision has been made so that our membership and management can focus on designing, engineering and manufacturing the finest quality products for the future success of the Chrysler Group."
Canadian Auto Workers president Buzz Hargrove said he was assured that the collective bargaining agreement with Chrysler would be honored and that no jobs would be eliminated. Analysts in the industry said last week that Magna International founder and Chairman Frank Stronach was the likely leading bidder for Chrysler. Billionaire investor Kirk Kerkorian, who tried to take control of Chrysler in the 1990s, also has said he would make a bid, but it was apparently spurned.
As Chrysler's stock price continued to dishearten, Zetsche announced last Feb. 14 that all options were open for Chrysler, which lost $1.5 billion in 2006 and is recuperating will eventually shed 13,000 jobs.
A sign of growing confidence
The Cerberus Chairman John W. Snow said the deal was a sign of faith in Chrysler, an iconic American brand and third-largest U.S. carmaker behind General Motors Corp. and Ford Motor Co. Snow, the former U.S. treasury secretary, was named chairman of the firm last October. Former Vice President Dan Quayle is also an adviser.
David W. Thursfield, who used to run Ford in Europe, is a senior member of the operations team in Cerberus' automotive and industrial practice. And Wolfgang Bernhard, the former Chrysler CEO, is a newcomer to Cerberus. "We welcome Chrysler into the Cerberus family of companies and believe Cerberus will be a good home for Chrysler," he said in a statement. "Most importantly, we believe in Chrysler."
In 2006, GM sold a majority stake in its General Motors Acceptance Corp. financing arm to a consortium of investors led by Cerberus for about $14 billion. Analysts said that purchasing a large stake in Chrysler would let Cerberus combine GMAC operations with Chrysler Financial.
In December, Cerberus was part of a consortium of investors that said it would invest $3.4 billion in the ailing auto parts giant Delphi Corp. in exchange for new shares of Delphi stock as it surfaced from Chapter 11 bankruptcy protection.
