Chrysler sold: Cerberus takes majority interest, Benz collaboration continues

US private equity company, Cerberus Capital Management has bought the Chrysler Group. The purchase includes the Jeep and Dodge brands and sees DaimlerChrysler -- the company formed by the takeover of Chrysler by Mercedes-Benz -- retain a significant shareholding.

A New York company, Cerberus is one of the largest private investment firms in the world, with approximately $US23.5 billion under management. Founded in 1992, it boasts worldwide investments in more than 50 companies that, in total, generate more than $US60 billion in annual revenues.

Cerberus will inject around EUR 5.5 billion into a 'new' debt-free Chrysler.

Of the total capital contribution, EUR 3.7 billion will go to the car making business (Chrysler Corporation LLC) while EUR 0.8 billion will establish a financial services business to provide credit services for the brands.

DaimlerChrysler will receive the balance of EUR 1.0 billion but will then grant a loan of EUR 0.3 billion to Chrysler Corporation LLC.

Cerberus will hold 80.1 per cent of the 'new' Chrysler with DaimlerChrysler's stake sitting at 19.1 per cent. DaimlerChrysler will eventually change its name to simply Daimler to reflect the change in circumstance. In addition Chrysler reps such as boss Tom LaSorda (pictured) will leave the DC board.

The official announcement of the deal was made early this week. It is still subject to some financial and regulatory processes, but is a fait accompli.

Respected US financial newspaper, The Wall Street Journal, called the deal "a watershed" in that it is the first purchase of a global automotive entity by a private equity firm.

As one would expect, DaimlerChrysler, Cerberus and US car industry unionists are all talking up the deal which will see DaimlerChrysler divested of any direct obligations to workers health or pension liabilities. The obligation is estimated at around $US18 billion.

In operational terms, it is unlikely the deal will affect Chrysler outposts like Chrysler Group Australia in the near future.

The company has made statements on a number of general issues. The official comments are reproduced hereabouts.

>> Effects on key financials
The transaction will have the following effects according to DaimlerChrysler:

"In total, current estimates indicate that net profit according to IFRS in 2007 will be reduced by EUR 3-4 billion. Due to the deconsolidation of the Chrysler companies and the resulting reduction in the balance-sheet total, the equity ratio of DaimlerChrysler's industrial business is expected to increase to more than 40 per cent by the beginning of 2008.

"There will be no changes relating to the bonds issued and guaranteed by DaimlerChrysler AG. In the financial services business for the Chrysler, Jeep and Dodge brands, Cerberus will take over the financing previously provided by DaimlerChrysler AG."

The closing of the transaction is expected to take place in the third quarter of 2007.

Dr Dieter Zetsche, Chairman of the Board of Management of DaimlerChrysler AG and Head of the Mercedes Car Group: "We're confident that we've found the solution that will create the greatest overall value -- both for Daimler and Chrysler. With this transaction, we have created the right conditions for a new start for Chrysler and Daimler."

Ron Gettelfinger, President of the United Autoworkers (UAW): "The transaction with Cerberus is in the best interests of our UAW members, the Chrysler Group and Daimler. We are pleased that this decision has been made. Because our members and the management can now focus entirely on the development and manufacture of quality products for the future of the Chrysler Group."

John W Snow, Chairman of Cerberus Capital Management, L.P.: "We welcome Chrysler into the Cerberus family of companies and believe Cerberus will be a good home for Chrysler. Cerberus believes in the inherent strength of U.S. manufacturing and of the U.S. auto industry. Most importantly, we believe in Chrysler."

Snow continued: "We are aware that Chrysler faces significant challenges, but we are confident that they can and will be overcome. A private investment firm like Cerberus will provide management with the opportunity to focus on their long-term plans rather than the pressures of short-term earnings expectations."

>> Business progress
DaimlerChrysler says the synergies possible between Mercedes-Benz and Chrysler have been fully utilized in the 10 years since the two companies 'merged'.  Billed as a "merger of equals" the union was never anything other than a takeover by Mercedes Benz.

DC's statement says: "Additional potential for collaboration is limited between two businesses operating in such different market segments. The strong volatility and pressure on margins in the Chrysler Group's North American core market have an increasingly negative impact on DaimlerChrysler's overall profitability and share-price development.

"The Chrysler Group has made substantial progress in recent years. For example, production hours per vehicle have fallen from 48 hours in 2001 to just over 30 at present. Quality has improved by more than 40 per cent over the past six years. Since 2002, more than EUR 7.4 billion ($US10 billion) has been invested in new production facilities and technologies. And with 34 new models since 2001, Chrysler has one of the youngest product lines in the industry."

Zetsche: "As a result, Chrysler today is structurally more sound than its North American based competitors. And with Cerberus as a partner, Chrysler will have the best chances of utilizing its full potential."

>> On collaboration with DC
DC says existing projects between the Chrysler and Mercedes car groups will be continued. These include the development of conventional and alternative drive systems, purchasing, and sales and financial services outside the NAFTA region.

In a move that mirrors Nissan and Renault's joint venture, DC says: "a  Joint Automotive Council will be established in which representatives of both sides will assess and decide on the potential of new and current projects. The Council will be led by board-level members from each company."

Zetsche said: "We very much look forward to our continued cooperation as business partners, as we want to continue to reap the mutual benefits of working together. That's one of the reasons why we're retaining a 19.9 per cent equity position in Chrysler."

He also stated the purchase will not be followed by more job cuts than were already planned.

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