DaimlerChrysler AG said Monday it will sell 80.1 percent of its US luxury division Chrysler Group to private equity firm Cerberus Capital Management LP for $ 7.4 billion. The deal aims to undo a troubled 1998 merger that was primarily aimed at creating a world automotive leader.
The lucky suitor
Cerberus, one of the world’s leading private equity firms, has been a top suitor for Chrysler since the company went on the market in mid-February. The Cerberus offering was spurred by the hiring of Bernhard, who helped lead Chrysler’s latest comeback during his tenure as COO from 2001 to 2004.
Bernhard has been joined by the Cerberus team by other automotive industry experts including former Ford Motor Co. marketing executive Robert Rewey. Additionally, Cerberus is said to be working closely with research firm JD Power and Associates and its senior vice president Gary Dilts, who previously led the Chrysler sales staff.
Analysts had previously viewed Magna as the most powerful suitor due to its industrial experience and Stronach’s ambitions to be a major player in the global auto industry. “The charm of Magna’s offering was that he was someone with strong vision,” said Christoph Stürmer, a Frankfurt-based analyst at consultancy Global Insight. “Now it is regressing.” Magna is said to have hurt its chances of buying Chrysler with its shocking announcement this week of a stock alliance with tycoon Oleg Deripaska.
The divorce
The rapid reversal of DCX’s $ 36 billion acquisition of Chrysler that tried to set the mold for global automakers is as swift as Chilton. It also represents a big gamble for Cerberus, which agreed to bear billions of dollars in pensions and retiree health care costs at Chrysler.
“We are confident that we have found the solution that will generate the greatest overall value for both Daimler and Chrysler,” said CEO Dieter Zetsche, who oversaw Chrysler before becoming DCX CEO last year. “With this transaction, we have created the right conditions for a fresh start for Chrysler and Daimler,” he continued.
DCX shareholders have reacted with confidence, causing DaimlerChrysler shares to rise 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 look forward to our continued cooperation as business partners, as we want to continue reaping the mutual benefits of working together,” said Zetsche. “That is one of the reasons we have a 19.9 percent equity position in Chrysler,” he added. DCX said the deal is likely to be complete by the third quarter and that it would cut its overall earnings by as much as $ 5.4 billion for 2007.
The German automaker said shareholders must approve the company’s name change to Daimler AG. A vote is likely to be scheduled for this fall. DCX also said that a Cerberus subsidiary will have a majority of a new Chrysler Holding LLC, while the company will retain a 19.9 percent stake. Chrysler will maintain its strong obligations for pensions and health care costs, the main problem complicating DCX’s effort to sell the division.
The idea of a sale to a private equity firm had upset unions in the United States because of the firms’ propensity to cut costs and jobs. But United Auto Workers (UAW) president Ron Gettelfinger called it the best option. Private equity companies often use the money provided by pension funds and evade wealthy private funds and investors to acquire public companies or their parts and make them private. Also, they reorganize and then sell the company at a profit.
Anticipated consequences
“The transaction with Cerberus is in the best interest 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 “divest and turn around” the company by selling it in parts. On Monday, Gettelfinger said Zetsche and Chrysler Chairman Tom LaSorda told it that keeping it as part of the larger company was no longer an option.
“In addition, the process for selecting the preferred investor for the Chrysler Group was fully explained,” Gettelfinger said. “We are pleased now 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 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 jobs would not be cut. Industry analysts said last week that Magna International founder and president Frank Stronach was likely the highest bidder for Chrysler. Billionaire investor Kirk Kerkorian, who tried to take control of Chrysler in the 1990s, also said he would make an offer, but it was apparently rejected.
As Chrysler’s stock price continued to fall, Zetsche announced last February. If all options were open to Chrysler, which lost $ 1.5 billion in 2006 and is on the mend, it will eventually cut 13,000 jobs.
A sign of growing confidence
Cerberus Chairman John W. Snow said the deal was a sign of faith in Chrysler, an iconic American brand and America’s third-largest automaker behind General Motors Corp. and Ford Motor Co. Snow, formerly Secretary of the Treasury of the United States, he was appointed president of the firm last October. Former Vice President Dan Quayle is also an advisor.
David W. Thrufield, 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 CEO of Chrysler, is a newcomer to Cerberus. “We welcome Chrysler to the Cerberus family of companies and believe that Cerberus will be a good home for Chrysler,” it said in a statement. “The most important thing is that we believe in Chrysler.”
In 2006, GM sold a majority stake in General Motors Acceptance Corp. financing arm to a consortium of investors led by Cerberus for about $ 14 billion. Analysts said the purchase of a large stake in Chrysler would allow Cerberus to combine GMAC’s operations with Chrysler Financial.
In December, Cerberus was part of a consortium of investors that said it would invest $ 3.4 billion in auto parts giant Delphi Corp. in exchange for new Delphi shares that emerged from Chapter 11 bankruptcy protection.