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Chrysler, GM In Talks To Develop Large SUV: Report

CNBC.com
Thursday, 15 Feb 2007 | 12:06 PM ET

DaimlerChrysler's Chrysler Group and GeneralMotors are in talks to develop jointly a large SUV like the Chevrolet Suburban, which Chrysler doesn't have in its current lineup, the Wall Street Journal reported.

AP

The talks have been going on for six months and no conclusion has been reached yet, according to a person familiar with the situation, who was interviewed by the paper.

According to the report such a deal could reduce development costs for Chrysler, which had a $1.5 billion operating loss for 2006.

Meanwhile, spinning off Chrysler on the stock market may be easier and faster than finding someone to buy the unprofitable car maker, analysts told Reuters.

Indian or Chinese carmakers eager to expand into the world's biggest car market might find Chrysler an attractive opportunity, and a handful of European carmakers could use some of its spare capacity.

But Chrysler's unionized workforce, unfunded health and pension liabilities, and hefty losses will make investors think twice about taking on any financial exposure, they said.

Spin Off Up to Quarter

Analyst Christoph Stuermer at Global Insight suggested DaimlerChrysler could float up to a quarter of Chrysler, thus raising funds while winning back some of the U.S. investors who departed after the 1998 Chrysler merger with Daimler-Benz.

Arndt Ellinghorst at Dresdner Kleinwort envisaged nursing Chrysler back to health and then floating it with the goal of creating the kind of alliance that France's Renault has with separately listed Japan's Nissan Motor.

In a research note, Dresdner said separating Chrysler from its German parent seemed possible because the official German document for reporting the legal obligations of DaimlerChrysler AG makes no mention of Chrysler's healthcare liabilities.

"The absence of Chrysler's 15.8 billion euros in unfunded healthcare obligations would thus not weigh on Daimler post a de-merger. We believe the remaining 2.6 billion pension obligations would not hinder a de-merger decision," it added.

One investment banker who follows the auto sector closely named Volkswagen, Renault, PSA and Fiat as likely partners for Chrysler.

"Lots of Synergies"

"There are lots of synergies with Chrysler given no U.S. presence and not much product overlap," he said. "Daimler could keep a share of 30 to 51 percent and the other manufacturer have between 25 and 70 percent. You could even involve private equity."

But Carlos Ghosn, chief executive of both Renault and Nissan, has lost much of his appetite for a U.S. partner after talks on an alliance with General Motors <GM.N> fell apart.

"The focus of management at Renault and Nissan is on restoring profits and as long as performance has not taken off I think it would be dangerous to extend the alliance," he told reporters this month.

Fiat declined comment.

Morgan Stanley analysts pointed out in a research note that Chrysler had a lot to offer, including flexible manufacturing capacity, three brands including the Jeep, purchasing scale, distribution, technology, and leadership in key segments such as minivans and pick-up trucks.

"There happens to be a queue of companies that could use some of this capacity on a plant-by-plant basis," they said, citing China's Chery, VW, Renault and Nissan.

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