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article imagePrivate Equity Firm Cerberus Plans to Bail Out Chrysler

By rob13     May 14, 2007 in Business
Cerberus has announced plans to buy a majority portion of the Chrysler business from DaimlerChrysler for $7.4 billion dollars.
DaimlerChrysler said on Monday Cerberus will receive an approximate 80 percent stake in the Chrysler group, and this skate will also include interest in Chrysler related financial services.
At the time of its founding nine years ago, DaimlerChrysler created a transatlantic merger that was worth roughly $36 billion dollars, but now Cerberus is buying into this once proud auto company at a fraction of its original net worth.
This deal has been in the work for months, and this will be the first time a US automaker has been held by a private equity group.
"Cerberus is the right strategic buyer for Chrysler, with a long-term commitment to Chrysler's growth and success. They are committed to working constructively with both union leadership and Chrysler's management team to help Chrysler realize its full potential," Chrysler President Tom LaSorda said.
At the moment, this move will not result in any job losses beyond the February announced plans of 13,000 job cuts. These job losses came on the heels of a report issued by DaimlerChrysler stating the company suffered $1.5 billion in operation losses for 2006. These losses were attributed to high fuel prices which led customers to flee their lineup of pickup trucks and sport utility vehicles.
This deals breaks up the mass-marketed line-up of American cars featuring
Jeep, Dodge and Chrysler that went along with Germany's premium Mercedes-Benz, luxury Maybach and Smart minicar brands.
This deal states Chrysler will be responsible for billions of dollars in pension and health care obligations resulting in a net cash outflow of 0.5 billion euros ($677 million) for the world's fifth-biggest car maker.
The German half of this automaker will, once this deal is approved by stockholders, go back to their original name of Daimler AG. Under the terms of this agreement, Daimler will still have to pony up another 650 million euros to cover long-term liabilities at Chrysler. This deal will also cut 2007's net profit by 3-4 billion euros.
"Even though I don't think there is a very strong valuation story, there is a very strong visibility story. One of the great parts of uncertainty surrounding Daimler is now not so uncertain," said Nomura analyst Michael Tyndall.
DaimlerChrysler put the Chrysler brand up for sale in February because they were dismayed over volatile earnings reports.
Bidders who went public with their intentions to buy Chrysler were Kerkorian's Tracinda Corp. and Canadian auto-parts maker Magna International. Another Private equity firm, Blackstone Group, was also in the bidding for Chrysler, and it was said Blackstone was linked up with smaller buyout firm Centerbridge Partners in pursuing the bid for Chrysler.
Cerberus is a New York based investment fund that has built a massive private equity and hedge-fund practice. Wolfgang Bernhard, who helped turn Chrysler around early this decade, was hired as an adviser on this deal.
One of the keys to this deal was the company's unfunded obligations to health care related liabilities Chrysler had with the United Auto Workers ( UAW ). UAW represents factory workers at DaimlerChrysler, and these liabilities are estimated to be around $14.1 billion euros as of the end of last year. DaimlerChrysler released a statement saying Chrysler will live up to their responsibilities for this debt.
UAW President Ron Gettelfinger, who sits on DaimlerChrysler's supervisory board and had publicly opposed a sale to a private equity buyer, hailed the deal.
"The transaction with Cerberus is in the best interests of our UAW members, the Chrysler Group and Daimler," he said.
A main obstacle to Chrysler becoming profitable in 2008 will be their ability, or lack of ability, in ironing out a new contract with the UAW. It is believed Chrysler will be looking for a contract that reduces costs, particularly for health care, when the current contract expires in September.
"That unfunded health care really determines how much the business is worth," Nomura's Tyndall said, noting Bernhard, who used to be Chrysler's chief operating officer, was as well placed as any to have a clear view of this.
Cerberus does have some experience in the auto industry. Last year, General motors sold a 51 percent claim in their GMAC financing arm to a group of investors led by Cerberus. This deal was believed to be worth $14 billion dollars.
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