Cerberus to pay $7.4B for Chrysler stake

Cerberus to pay $7.4B for Chrysler stake

TOM KRISHER, AP Auto Writer
2 minutes ago

DETROIT - Chrysler's 80,000 workers may pay the price for German-based parent DaimlerChrysler's decision on Monday to turn over the keys of its U.S. car company to private equity firm Cerberus Capital Management for $7.4 billion.

Talks begin soon between the United Auto Workers' and Detroit's car makers on a national contract and analysts expect Cerberus, headed by former Treasury Secretary John Snow, to push for radical changes at its money-losing Chrysler, Jeep and Dodge operations.

The announcement sent shudders through much of Chrysler's work force, despite assurances from Chrysler CEO Tom LaSorda that there are no major plans under discussion with Cerberus to cut jobs beyond a previously announced restructuring plan.

That wasn't good enough for Canadian Auto Workers' President Buzz Hargrove. He said he had "enormous concerns," noting that many private equity groups have a long-standing history of "job cuts as opposed to job creation."

The sale of 80.1 percent of Chrysler to Cerberus Capital Management LP unwinds the messy $36 billion marriage in 1998 that was set up to create the ultimate global automotive powerhouse.

Instead, the maker of the upscale Mercedes Benz brand of cars found itself, like competitors Ford and General Motors, battered by rising pension and retiree health costs in the United States as Toyota and other Asian manufacturers won the hearts of U.S. consumers with what many view as more reliable, fuel-efficient models.

Germany-based DaimlerChrysler AG said it would keep a 19.1 percent stake in the renamed Chrysler Holdings LLC. The private company will be run by Cerberus, which said it would keep the present management in place.

So anxious was DaimlerChrysler to end the trans-Atlantic tieup that it could be on the hook to pay as much as $650 million — in exchange for being absolved for $19 billion in retiree health care costs that will be the responsibility of the new Chrysler owners.

The $7.4 billion deal works this way: Cerberus will invest $5 billion in the new Chrysler's automotive operations, $1.05 billion in Chrysler's financial arm and pay $1.35 billion to DaimlerChrysler. But the German automaker agreed to absorb $1.6 billion in restructuring-related costs and loan the new company $400 million. Depending on whether the loan is repaid, its out-of-pocket costs could ultimately total $650 million.

Cerberus has steadily been building strength in the automobile business. It led a consortium that bought a majority stake last year in General Motors Acceptance Corp., the financial arm of GM, and planned to invest in ailing auto parts giant Delphi Corp.

UAW President Ron Gettelfinger said Monday that after his pitch to keep Daimler and Chrysler together failed, it became clear that Cerberus was the best option for workers.

"So once that decision's been made, then you've got to deal with the cards that you're dealt," he said Monday afternoon, adding that he did not think the sale would have an impact on upcoming national contract talks.

Chrysler and the other Detroit automakers were caught flat-footed when gasoline prices spiked to around $3 per gallon after Hurricane Katrina, sending buyers away from the truck-based models on which they made most of their money.

Cerberus Chairman Snow tried to reassure workers during a news conference, saying his company is in the investment for the long term, with plans to keep Chrysler's management and work with unions to return the struggling automaker to profitability.

"We think at this particular point in Chrysler's history, there may be opportunities in the private world, the world of private investment, that create more room for growth and expansion, that allow management to focus with greater intensity on the day-to-day business of producing better cars," Snow said at a news conference in Germany.

Car buyers have little to fear from the transaction, according to one industry analyst, because warranties and spare parts requirements must be honored by law.

"From a consumer perspective, in the practical sense, there's no real downside. I think consumers are pretty well protected," said Jeremy Anwyl, president of the Edmunds.com automotive Web site.

Consumers, he said, may benefit from the deal because Chrysler will have more money to invest in its products.

Investors also liked the news. DaimlerChrysler's shares rose $2.12, or 2.6 percent, to close at $84.12. They have traded in a 52-week range of $45.98 to $84.90.

Daimler will continue to work with Chrysler on drive systems, purchasing, sales and financial services outside North America. But it was clear that DaimlerChrysler and its chief executive Dieter Zetsche, had lost confidence in a Chrysler.

"We determined that DaimlerChrysler, as currently structured, would not provide the best" framework, Zetsche told reporters in Stuttgart.

Some analysts said Cerberus' entry into auto-making could be a plus for Ford and GM because Cerberus is more likely to be a catalyst for change in bargaining with unions.

Talks between the Detroit Three and the UAW on a new national contract formally are set to begin in July, with the master contract expiring in September. All three have said they need lower labor costs to compete in a global automotive market, mainly with Asian manufacturers.

With Cerberus, it's unlikely that the UAW would remain unwilling to give Chrysler the same health care concessions that it gave Ford and GM, Morgan Stanley analyst Jonathan Steinmetz said in a note to investors.

Yet Snow said at the news conference that he and his company respected organized labor.

"I think Cerberus has a good record of working successfully with companies that are organized and we respect the role of organized labor and we greatly appreciate the support the UAW has given to this transaction," he said.

The UAW's endorsement was a shift from earlier this year, when Gettelfinger warned that a private equity buyer would "strip and flip" the company by selling it off in pieces.

The deal, which is to be completed by the third quarter, probably will reduce Daimler's overall profit by as much as $5.4 billion for 2007, the company said. It still must be approved by Daimler's supervisory board, but that is seen as a formality.

Snow said that under Chrysler's leadership, the company's quality and productivity have risen and it has a variety of new products that will be well-received in the marketplace.

Private equity firms typically use money provided by pension and hedge funds and wealthy private investors to acquire all or part of public companies and take them private, often to reorganize and later sell at a profit.

Aaron Bragman, a research analyst for Global Insight, an economic research and consulting company, said fixing Chrysler and taking it public is one possibility for Cerberus to get its money back, along with keeping it or selling to another automaker.

Regardless of what path Cerberus takes, Bragman sees the firm keeping Chrysler for at least two or three years.

"It's going to take that long just to turn Chrysler around and follow through with the turnaround plan that's already in place," he said.

In addition to Cerberus, billionaire investor Kirk Kerkorian's Tracinda Corp. and Blackstone Group, a private equity firm, were among those interested in Chrysler, along with Canadian auto parts maker Magna International Inc. and General Motors Corp.
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AP Business Writer Matt Moore in Frankfurt, Germany and Associated Press writers Ken Thomas in Washington and Corey Williams in Detroit contributed to this report.
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On the Net:

Cerberus Capital Management LP: http://www.cerberuscapital.com

DaimlerChrysler AG: http://www.daimlerchrysler.com