Magna and Ripplewood to Bid for Chrysler?

Cerberus goes it alone, but Magna International could partner with private equity player Ripplewood to buy Chrysler

by Gail Edmondson and David Welch

In the final hours before potential buyers must submit bids to DaimlerChrysler (DCX) for its ailing Chrysler Group unit, private equity group Cerberus Capital Management has decided to go it alone, instead of bidding together with Canadian auto supplier Magna International (MGA), sources close to Cerberus and Magna say. Sources say the two sides couldn't come to terms on how they would structure a deal, and that Magna Chairman Frank Stronach wanted more control over a transaction than Cerberus would permit.

Meanwhile, Magna, which has a front seat at the bidding table, is interested in a minority stake in Chrysler and is teaming up with a private equity player. KeyBanc Capital Markets analyst Brett Hoselton said earlier this week that Magna has picked a private equity partner, and a source close to Magna says the company is linked with New York-based Ripplewood Holdings.

Many industry watchers have questioned whether a bid from Magna makes sense. While the company has experience running car plants, it has not engineered complete models and taken them to market.

A Powerful Partnership

But a Magna-Ripplewood partnership would give the two parties a leg up. Ripplewood brings money and the expertise of its industrial partner, former Chrysler Group President Thomas Stallkamp, to the table.

Magna brings a wealth of industrial experience. The Canadian parts maker assembles entire cars for DaimlerChrysler, BMW, and General Motors (GM) in Europe. Magna has plenty of ties to Chrysler. It recently acquired a transmission-parts plant in Syracuse, N.Y., from Chrysler and manages the paint shop in a Jeep factory in Toledo.

Sources say Chrysler is attracting bids in excess of $6 billion. Magna has just $1.9 billion in free cash, and Stronach doesn't like taking on debt.

GM Looming in the Background

Ripplewood is no stranger to the auto business, having invested in parts makers in recent years as well as owning a stake in dealer chain Asbury Automotive Group (ABG). Stallkamp could not be reached for comment, but in an interview two weeks ago, he told BusinessWeek that Magna would give any private equity player what they need to make the deal work: a partner that knows the industry, organized labor, and how to manage factories (see BusinessWeek.com, 2/20/07, "Kicking the Tires at Chrysler").

Cerberus and Ripplewood both make compelling cases for their bids. Both have invested in automotive companies and both have ex-Chrysler executives in prominent roles.

Private equity player Blackstone Group is also in the bidding. In the background looms General Motors, which had also expressed an interest in buying the company. But GM executives say privately that they do not want to pay much to acquire Chrysler. The auto giant would rather sit back, wait to see if a private equity bid wins, and come in if the negotiations yield no sale.

Cheap Assets on the Block

Cerberus hired ex-Chrysler Group Chief Operating Officer Wolfgang Bernhard as its lead player in the Chrysler bid. The company last November bought 51% of General Motors' GMAC finance arm, has a bid in to buy parts firm Delphi (DPHI) out of bankruptcy, and has just acquired some assets from parts maker Tower Automotive for $1 billion.

While it may be a natural link to say both firms are trying to make their own multifaceted automotive conglomerates, that's not the case. Each private equity firm simply sees a troubled industry with cheap assets on the block. "They don't see themselves as the next Billy Durant or Henry Ford," says longtime industry watcher Maryann Keller, who sits on the boards of rental-car company Dollar Thrifty Automotive Group (DTG) and dealer group Lithia Motors (LAD). "They see cheap assets in an industry that isn't going to go to zero."