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Private Equity firm buys Chrysler as 9-year-old marriage with Daimler ends

Private Equity firm buys Chrysler as 9-year-old marriage with Daimler ends
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First Published: Tue, May 15 2007. 04 30 AM IST
Updated: Tue, May 15 2007. 04 30 AM IST
Frankfurt/Detroit: DaimlerChrysler AG shed most of its stake in the money-losing Chrysler Group by agreeing to pay a $1.55 billion (Rs 6,300 crore) sweetener to clinch a deal for a private equity firm to take over the US automaker.
The deal, which marks the first time a Big Three US automaker will be run by a private equity company, requires new owner Cerberus Capital Management to contribute more than $6 billion to shore up the balance sheet of the struggling automaker and its finance arm.
Daimler agreed to kick in $1.55 billion to Chrysler in order to exit a nine-year-old merger that had failed to deliver on its promise to create a global automotive powerhouse.
“We obviously overestimated the potential for synergies,” said Dieter Zetsche, chief executive of DaimlerChrysler. “Experience has shown us there is potential in working together but given the very different nature of our original markets ... those synergies are limited.”
Daimler paid $36 billion to acquire Chrysler in 1998, when it intended to marry mass-market brands like Jeep with luxury brands like Mercedes.
Under the terms of the unwinding, Cerberus Capital Management gets an 80.1% stake in Chrysler and its related financial services business.
The deal won a cautious endorsement from Chrysler’s main union, the United Auto Workers, surprising Wall Street analysts. Shares of DaimlerChrysler, General Motors Corp. and Ford Motor Co. all gained in reaction to the deal.
Of Cerberus’ $7.4 billion commitment, $6.05 billion will be put into Chrysler—$5 billion into auto operations and $1.05 billion into its finance arm.
Cerberus will pay $1.35 billion to Daimler, which in turn is loaning $405 million to Chrysler.
The German company—whose name will change to Daimler AG if shareholders approve—will contribute $880 million to cover long-term liabilities at Chrysler.
It also agreed to transfer Chrysler’s auto business free of debt, saying that would mean a net cash cost of $680 million, or 500 million euros, from the sale.
Daimler estimated the deal would cut DaimlerChrysler’s 2007 net profit by $4 billion to $5.4 billion.
New York-based Cerberus is a private investment fund that has built a huge private equity and hedge-fund practice. It hired Wolfgang Bernhard, who helped turn Chrysler around early this decade, as an adviser on the deal, but Snow said Bernhard would not play an active management role there again.
One key to the deal is the company’s unfunded health-care liabilities related to Chrysler’s contracts with its UAW-represented factory workers. These stood at around €14.1 billion at the end of last year.
DaimlerChrysler said the new Chrysler would keep the liabilities.
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First Published: Tue, May 15 2007. 04 30 AM IST
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