DaimlerChrysler AG announced Monday that it will sell 80.1 percent of its American luxury division Chrysler Group to private equity firm Cerberus Capital Management LP for $7.4 billion. The deal aims to resolve a troubled 1998 merger aimed primarily at creating a global automotive leader.
The happy admirer
Cerberus, one of the world’s leading private equity firms, has been a key contender for Chrysler since the company went up for sale in mid-February. Cerberus’ bid was spurred by the hiring of Bernhard, who helped lead Chrysler’s recent comeback during his tenure as chief operating officer from 2001-2004.
Bernhard was joined to the Cerberus team by other auto industry experts such as former Ford Motor Co. Marketing Director Robert Rewey. In addition, Cerberus is said to be working closely with research firm JD Power and Associates and its senior vice president Gary Dilts, who previously headed Chrysler’s sales force.
Analysts had previously viewed Magna as the strongest candidate given its industrial experience and Stronach’s ambitions to become a major player in the global auto industry. “The charm of Magna’s offer was that he was someone with a strong vision,” said Christoph Stürmer, a Frankfurt-based analyst at consulting firm Global Insight. “Now he’s kind of retiring.” Magna is said to have hurt its chances of buying Chrysler with its surprise announcement this week of an equity investment with tycoon Oleg Deripaska.
DCX’s fast-paced reversal of its $36 billion acquisition of Chrysler, which sought to set the mold for global automakers, is as fast as Chilton. It also represents a big bet for Cerberus, which has agreed to fund billions of dollars in pension and retiree healthcare costs at Chrysler.
“We are confident that we have found the solution that will create the greatest overall value for both Daimler and Chrysler,” said Chief Executive Dieter Zetsche, who ran Chrysler before becoming 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 reacted confidently and drove DaimlerChrysler shares up by more than seven percent after the deal was announced. Zetsche added that the two companies would continue to work together, particularly on existing conventional and alternative powertrains, purchasing, sales and financial services outside of North America.
“We are very much looking forward to continuing to work together as business partners, as we want to continue to benefit from the mutual benefits of working together,” said Zetsche. “It’s one of the reasons we’re keeping a 19.9 percent stake in Chrysler,” he added. DCX said the deal is likely to close by the third quarter and that it would reduce its overall 2007 earnings by as much as $5.4 billion.
The German automaker pointed out that the change of the company name to Daimler AG has to be approved by the shareholders. A vote is expected to be held in the fall of this year. DCX also said that a Cerberus subsidiary will hold a majority stake in a new Chrysler Holding LLC, while the company will retain a 19.9 percent stake. Chrysler will retain its hefty pension and health care obligations, the key issues complicating DCX’s efforts to sell the division.
The thought of selling it to a private equity firm had worried unions in the United States because the firms tended to cut costs and jobs. But United Auto Workers (UAW) President Ron Gettelfinger called it the best choice. Private equity firms typically use money provided by pension funds and evade funds and wealthy private investors to acquire and privatize public companies or parts thereof. They also reorganize the company and later sell it for a profit.
“The Cerberus transaction 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 change from earlier this year, when Gettelfinger warned that a private-equity buyer would “dismantle and flip” the company by selling it in parts. On Monday, Gettelfinger said he was told by Zetsche and Chrysler President Tom LaSorda that keeping it as part of broader society was no longer an option.
“In addition, the process for selecting the preferred investor for the Chrysler Group was explained in detail,” said Gettelfinger. “We are now pleased that the decision has been made so that our members and management can focus on designing, engineering and manufacturing the best quality products for the Chrysler Group’s future success.”
Canadian Auto Workers President Buzz Hargrove said he was assured the contract with Chrysler would be honored and no jobs would be lost. Industry analysts said last week that Magna International founder and chairman Frank Stronach is the likely lead bidder for Chrysler. Billionaire investor Kirk Kerkorian, who tried to take control of Chrysler in the 1990s, has also said he would make an offer, but it was apparently snubbed.
As Chrysler’s share price continued to be discouraging, Zetsche announced on February 14 that all options were open for Chrysler, which lost $1.5 billion in 2006 and is recovering, eventually shedding 13,000 jobs.
A sign of growing trust
Cerberus Chairman John W. Snow said the deal was a sign of confidence in Chrysler, an iconic American brand and the third-largest US automaker behind General Motors Corp. and Ford Motor Co. Snow, the former US Treasury Secretary, was appointed chairman of the company last October. Former Vice President Dan Quayle is also an advisor.
David W. Thursfield, formerly head of Ford Europe, is a senior member of the operations team in Cerberus’ automotive and industrial practice. And Wolfgang Bernhard, the former Chrysler boss, is new to Cerberus. “We welcome Chrysler to 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 controlling interest in its General Motors Acceptance Corp financing arm. for approximately $14 billion to a consortium of investors led by Cerberus. Analysts said buying a large stake in Chrysler would allow Cerberus to combine GMAC operations with Chrysler Financial.
In December, Cerberus was part of a consortium of investors that announced they would invest $3.4 billion in struggling auto parts giant Delphi Corp. Invest in exchange for new Delphi stock as it emerged from Chapter 11 bankruptcy protection.