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Business Week
May 14, 2007

Cerberus Nabs Chrysler

The private equity firm won the bidding for the troubled DaimlerChrysler division, but it has some tough slogging ahead

By David Welch

The troubled pair-up of Daimler and Chrysler is at long last coming to a close.

German automaker DaimlerChrysler (DCX) said today that it has reached an agreement to sell all but a 19.9% stake to private equity firm Cerberus Capital Management for $7.4 billion, ending a rocky eight-year tie-up between the two auto makers. "We're confident that we have come up with a solution that creates the best value for Daimler and the best opportunities for Chrysler," Daimler Chairman Dieter Zetsche said in a press conference.

For Daimler's part, the company reduced its exposure to troubled Chrysler, which lost $1.5 billion last year. Chrysler will assume all retiree obligations, including its overfunded pension plan and $18 billion in health-care liabilities. Zetsche said he expects the deal to be finalized in the third quarter.

The acquisition marks a new era for Chrysler, which will now be called Chrysler Holding LLC. The company will be privately held and largely controlled by Cerberus. The management team, including Chrysler Group CEO Thomas LaSorda, will remain in place.

Freedom from Quarterly Analyst Reports

Cerberus Chairman John W. Snow thinks that removing Chrysler from the public markets and pressure of quarterly earnings could help the carmaker restructure and get back on track. "Sometimes companies do better outside the requirements of quarterly analyst reports," Snow said. "We believe that's the case with Chrysler."

Snow says Cerberus wants to take a long-term approach to fixing the car business. Says Snow: "We want to take LaSorda and management and let them focus."

Chrysler has another advantage from the new deal. The company is being spun out from Daimler debt-free, Zetsche said in the press conference.
Of the $7.4 billion paid by Cerberus, Daimler will inject $5 billion into Chrysler Corp. LLC, the car business owned by Chrysler Holding, and another $1.05 billion into Chrysler Financial Services LLC, the auto lending arm. Adding up the costs to recapitalize Chrysler and fund certain obligations, Daimler will pay a net cash outflow of $650 million to unload Chrysler.

"Not a Benevolent Society"

Private equity control could make a big difference for a troubled U.S. auto industry as it heads into what many expect will be a landmark set of labor talks this summer.
Investors like Cerberus are known for buying troubled companies on the cheap, making swift changes, and taking them public or selling them once profitable. "This deal could pressure the UAW into doing something significant this summer," says David E. Cole, chairman of the Center for Automotive Research in Ann Arbor. "Private equity firms are not a benevolent society for the preservation of jobs."

Fixing Chrysler will necessitate more concessions from the union. For starters, new ownership will want the same concessions on health-care benefits that the UAW already gave to General Motors (GM) and Ford Motor (F).

More job cuts may be coming, too. Chrysler said in February that it will eliminate 13,000 jobs as it attempts to get back to profitability. The company says that cutting those jobs and closing one plant will be enough. But sales are down through April of this year versus last year for Chrysler—despite high sales incentives and big sales to rental fleets.

Getting concessions could be tough for Cerberus, though. Cerberus was also part of a bid for bankrupt parts maker Delphi (DPHIQ), but the deal is crumbling since the two sides cannot seem to come to a new agreement on wages and benefits for union workers.

Union Endorsement, But…

However, the UAW endorsed the deal. UAW President Ronald Gettelfinger said in a statement that he had an in-depth meeting with Zetsche and Chrysler Group CEO LaSorda, in Stuttgart. The two union officers also met with LaSorda and John Franciosi, Senior Vice President of Employee Relations for the Chrysler Group "for additional clarification on issues impacting our membership," Gettelfinger said.

After those meetings, Gettelfinger said that he thinks the deal is in the best interest of Chrysler's 50,000 UAW members. Says Cerberus Chairman Snow: "We have received a response from Mr. Gettelfinger that is so positive."

Even with Gettelfinger's endorsement, however, this summer's talks will be tough for everyone involved. All three U.S. carmakers face huge health-care liabilities and suffer a big cost disadvantage when compared with Japanese and Korean rivals.

Cerberus has, as an advisor, former Chrysler Group COO Wolfgang Bernhard. His presence and close relationship to Daimler Chairman Dieter Zetsche likely strengthened Cerberus's bid.

Other Bidders

Daimler had been considering two other bidders: a team of private equity firms Blackstone Group and Centerbridge Capital Partners, and a bid led by parts maker Magna Intl (MGA).

One source says Magna thought it was close to a deal last week. In recent weeks, many news reports have put Magna as having the inside track on a deal for Chrysler. Magna even had talks with two different private equity firms, including privatecompany name="Ripplewood Holdings" id="22717"/> before finding another investor, Canada-based Onex Partners, to join its bid.

But Zetsche said Cerberus was the best choice.

With Cerberus now in control, Chrysler will be a test case for whether new ownership and direction, coming from outside the hidebound ways of Detroit, can do any better at fixing Motown's intractable problems.

David Welch is BusinessWeek's Detroit bureau chief.

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