Cerberus Nabs Chrysler

The private equity firm won the bidding for the troubled DaimlerChrysler division, but it has some tough slogging ahead

by David Welch

The troubled pair-up of Daimler and Chrysler is at long last coming to a close.

German automaker DaimlerChrysler (DCX) said today that it has reached an agreement to sell all but a 19.9% stake to private equity firm Cerberus Capital Management for $7.4 billion, ending a rocky eight-year tie-up between the two auto makers. "We're confident that we have come up with a solution that creates the best value for Daimler and the best opportunities for Chrysler," Daimler Chairman Dieter Zetsche said in a press conference.

For Daimler's part, the company reduced its exposure to troubled Chrysler, which lost $1.5 billion last year. Chrysler will assume all retiree obligations, including its overfunded pension plan and $18 billion in health-care liabilities. Zetsche said he expects the deal to be finalized in the third quarter.

The acquisition marks a new era for Chrysler, which will now be called Chrysler Holding LLC. The company will be privately held and largely controlled by Cerberus. The management team, including Chrysler Group CEO Thomas LaSorda, will remain in place.

Freedom from Quarterly Analyst Reports

Cerberus Chairman John W. Snow thinks that removing Chrysler from the public markets and pressure of quarterly earnings could help the carmaker restructure and get back on track. "Sometimes companies do better outside the requirements of quarterly analyst reports," Snow said. "We believe that's the case with Chrysler."

Snow says Cerberus wants to take a long-term approach to fixing the car business. Says Snow: "We want to take LaSorda and management and let them focus."

Chrysler has another advantage from the new deal. The company is being spun out from Daimler debt-free, Zetsche said in the press conference.

Of the $7.4 billion paid by Cerberus, Daimler will inject $5 billion into Chrysler Corp. LLC, the car business owned by Chrysler Holding, and another $1.05 billion into Chrysler Financial Services LLC, the auto lending arm. Adding up the costs to recapitalize Chrysler and fund certain obligations, Daimler will pay a net cash outflow of $650 million to unload Chrysler.

"Not a Benevolent Society"

Private equity control could make a big difference for a troubled U.S. auto industry as it heads into what many expect will be a landmark set of labor talks this summer.

Investors like Cerberus are known for buying troubled companies on the cheap, making swift changes, and taking them public or selling them once profitable. "This deal could pressure the UAW into doing something significant this summer," says David E. Cole, chairman of the Center for Automotive Research in Ann Arbor. "Private equity firms are not a benevolent society for the preservation of jobs."

Fixing Chrysler will necessitate more concessions from the union. For starters, new ownership will want the same concessions on health-care benefits that the UAW already gave to General Motors (GM) and Ford Motor (F).

More job cuts may be coming, too. Chrysler said in February that it will eliminate 13,000 jobs as it attempts to get back to profitability. The company says that cutting those jobs and closing one plant will be enough. But sales are down through April of this year versus last year for Chrysler—despite high sales incentives and big sales to rental fleets