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Chrysler sold to Cerberus for $7.4B
By Elizabeth Strott
Three months to the day after DaimlerChrysler (DCX, news, msgs)announced that "all options" were on the table for its struggling U.S. Chrysler unit, private-equity firm Cerberus Capital Management said it would buy an 80.1% stake in Chrysler for $7.41 billion.
"We're confident that we've found the solution that will create the greatest overall value -- both for Daimler and Chrysler," CEO Dieter Zetsche said in a statement today. "With this transaction, we have created the right conditions for a new start for Chrysler and Daimler."
Cerberus beat out two other bidders: a partnership between rival private-equity players Blackstone Group and Centerbridge Capital Partners, and Canadian auto parts maker Magna International (MGA, news, msgs).
Shares of DaimlerChrysler jumped $4.76, or 5.8%, to $86.76 in pre-market trading on the news; the stock has risen 20% since Zetsche first announced the company's restructuring plans in February.
The deal is expected to close in the third quarter. Daimler will maintain a 19.9% stake in the new company.
The Cerberus deal is a good one for DaimlerChrysler, said Kevin Tynan, auto analyst at Argus Research.
"The expectation is that Cerberus will do some cutting and slashing to try to make it leaner and then turn around and selling it," Tynan said in an interview. "And Daimler will benefit from that by retaining about 20% of the company. What they got is pretty good."
The first big change: the company's name. The new company will be called Chrysler Holding, with the former German parent changing its name to Daimler, pending a special shareholders' meeting in the fall.
"We are confident that this transaction will create a standalone Chrysler that is financially stronger, with a winning combination of people, industry know-how, operational expertise and spirit of innovation that will accelerate the company's recovery, and help us regain our position as a competitive industry leader," Chrysler CEO Tom LaSorda said.
Daimler-Benz spent $36 billion for Chrysler in 1998 in what was then called a "merger of equals" -- but today's announcement unwinds what turned into a very unhappy marriage.
"I think Daimler's thrilled to get rid" of Chrysler and "auto workers will be happy to have it back in American hands," Richard Steinberg of Steinberg Global Asset Management told CNBC.
Disgruntled shareholders have been pushing DaimlerChrysler to get rid of its U.S. arm after the parent company reported a $1.5 billion loss for 2006.
How did Cerberus win?
Cerberus was the most attractive suitor for several reasons.
"From DaimlerChrysler's standpoint, it's purely about who could put the most cash in their pockets the fastest," Dan Luria, an analyst for the Michigan Manufacturing Technology Institute, told Bloomberg News. "Cerberus clearly has deep pockets."
A key factor in the deal wasn't the price tag, but what to do with Chrysler's $18 billion in pension and health care liabilities.
DaimlerChrysler said Cerberus would not be taking on any Chrysler debt, but would be responsible for its pension and health care costs. Chrysler, like other U.S. auto makers, has been weighed down by massive obligations to its workers.
Cerberus also gave itself an edge by hiring Chrysler's former chief operating officer, Wolfgang Bernhard, as an adviser.
The private-equity firm said it will invest $5 billion into the new company, with $1.45 billion going to DaimlerChrysler -- which, in turn, said it would invest $600 million into the new Chrysler company.
Cerberus will also invest $1.05 billion into Chrysler's financial arm -- an attractive synergy for the private-equity firm, which already has 51% stake in GMAC (GMAC, news, msgs), General Motors' (GM, news, msgs) financing business.
Magna never the front-runner
The news contradicts recent reports from German papers that suggested that Magna was the only bidder left for Chrysler. Just last week, Magna announced that Russian billionaire Oleg Deripaska had bought a $1.54 billion stake in the company, and Magna Chairman Frank Stronach said the investment by Deripaska would make the company a more attractive bidder for Chrysler.
But then a few days later Magna told German newspaper Frankfurter Allgemeine Zeitung that it only wants a minority stake in Chrysler. Magna had already identified Canadian investment firm Onex as one partner in its fight for Chrysler.
Magna, which had confirmed its interest in a potential purchase of Chrysler on April 13, had been expected to offer between $4.6 billion and $4.7 billion for the unit. DaimlerChrysler is one of Magna's biggest customers.
Billionaire investor Kirk Kerkorian also had made a public $4.5 billion bid for Chrysler in early April, but the company froze him out of any further talks about a sale.
No union opposition?
"The transaction with Cerberus is in the best interests of our UAW members, the Chrysler Group and Daimler," United Auto Workers President Ron Gettelfinger said in a statement today.
The UAW's support was a shock to many. Since talks of a Chrysler sale first surfaced in February, unions have urged DaimlerChrysler to keep Chrysler part of the company.
"It's very, very worrisome for us," Canadian Auto Workers union President Buzz Hargrove said to Reuters today. "I don't have any bone to pick with (Cerberus), but the whole point of private equity is not to grow the business over the long term and that's what we need."
Analyst Tynan pointed out that the unions may have felt they were out of options.
"I was a little bit surprised about the UAW supporting the deal, as they are leery of private equity," Tynan said. "But what were the options? What's better, the devil you know or the devil you don't? . . . Any private equity strategy was going to be better than what is in place."
Still, things could heat up this summer, when the UAW starts negotiating new contracts with Chrysler.
The UAW represents the majority of Chrysler's employees: 50,000 of the auto maker's 80,000 staff. The CAW represents about 10,000 Chrysler workers.
Detroit's dizzying woes
Chrysler has been far from alone in its troubles: All of the U.S. auto makers have struggled to cope with changing consumer tastes. Fellow U.S. auto maker Ford Motor (F, news, msgs) reported a shocking $10.75 billion loss last year. General Motors (GM, news, msgs) suffered as well, with a $2 billion loss in 2006.
Still, things might be starting to look up for the Big Three. GM reported earnings of $62 million for the first quarter of 2007 -- a 90% drop from the first quarter in 2006, but a profit nonetheless. And Ford's first-quarter loss shrank to $282 million from $1.42 billion in the same quarter last year.
DaimlerChrysler will report first-quarter earnings on Tuesday.
All are facing increased competition from Japanese auto maker Toyota Motor (TM, news, msgs), which in late April announced it had topped GM as the No. 1 global automobile company in terms of quarterly sales.
Toyota's share of the U.S. market rose to 15.6% in the first quarter, while GM had 22.4% and Ford held on to 17.1%, according to Autodata. Combined, GM, Ford and DaimlerChrysler commanded 51.6% of the U.S. market, down from 55.2% last year.
I knew it wouldn't last. Lets hope Chysler can reorganize itself back into a more viable competitor otherwise it'll sink like the Titanic.
Not a shock to anyone who's been following this. It would have been a Stretch Armstrong level reach for Magna to come up with that much capital, meaning it was between one of the two investment firms. Who knows what this will bring for ChryCo.
1989 Z24 Convertible - Dust Covered
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Can somebody break this down for me...I'm confused...
What falls under the Chrysler umbrella? What was sold off?
Are we talking Chrysler, Jeep, and Dodge are now "up in the air" so to speak? Or just Chrysler? Did Jeep and Dodge go, stay? Why am I so confused?
~The Flash~
Joshua Richardson
Chrylser was sold off.
That means chylser, dodge and jeep.
05 M6 YJ GTO 1 of 447 12.767@109.93
what is cerberus... other than the mythical creature
DCX stock jumped nearly 10% after the news, up $8/share.
Sunb1rd wrote:what is cerberus... other than the mythical creature
A virtually unknown firm famous for buying out major sinking companies.
They also bought Mervyn's, Blue Bird Corp. (The bus company), Remington Arms, and 51% of GMAC
Edited 1 time(s). Last edited Tuesday, May 15, 2007 3:30 PM
Huh, blue bird is just a few miles from here.
05 M6 YJ GTO 1 of 447 12.767@109.93
Problem was as I have been told. Dr. Z had no choice, the market kept buying the stock and increase the value hoping for a split. Dr. Z wanted to keep Chrysler to avoid a hostile takeover, that now Benz faces. Unforunately the stock would have fell over 25% if they did not split by the May Frankfurt shareholders meeting. Mercedes is NOT leaving any projects that it has with Chrysler. In fact they arte lunching new ones as we speak. Benz shareholders want two seperate companies and not to deal with the UAW anymore. If anything killed DCX it was the UAW and their unreasonable demands and the fact that they not only refused to give DCX the same consessions that GM and Ford got. But demanded more pay even as the company was posting lower anmd lower sales.
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