U.S. News

Chrysler to Be Acquired by Private-Equity Firm for $7.4 Billion

David Zalubowski

Private equity firm CerberusCapital Management will buy the majority of DaimlerChrysler'sstruggling Chrysler Group for $7.4 billion, a fraction of the $36 billion deal that created the transatlantic car union nine years ago.

Cerberus Capital Management gets an 80.1% stake in Chrysler and its related financial services business, DaimlerChrysler said on Monday, ending what was billed as a marriage made in heaven but that never lived up to the name.

"The investors in Europe have been clamoring for this for some time," CNBC’s Phil LeBeau said Monday. "…This is a case where this marriage just never worked to the degree that the people in Stuttgart thought it would work. I think after nine years, they’re happy to be rid of Chrysler."

The deal, months in the making, puts a major U.S. automaker in the hands of a private equity group for the first time.

"One thing they’re looking at and they’re very excited about is the possibility of taking Chrysler Financial, which is small compared to GMAC," LeBeau said. "But if you take Chrysler Financial and put that together with the 51% of GMAC, you’ve got a real nice financial institution, particularly when it comes to auto lending. On the Chrysler side, they’re not going to do anything in the foreseeable future -– five or six months down the road."

General Motors sold a 51% stake in its financing arm, GMAC, to a consortium led by Cerberus in a deal worth about $14 billion last year.

Once the transaction is closed, Cerberus will receive the automaking business of Chrysler free of debt.

Cerberus Buying Chrysler

“There will be a continuing relationship between Daimler and Chrysler,” Cerberus Chairman John Snow said Monday. “That’s a vote of confidence and I think it speaks well for the future of Daimler and Chrysler that we move forward together.”

"Cerberus is the right strategic buyer for Chrysler, with a long-term commitment to Chrysler's growth and success. They are committed to working constructively with both union leadership and Chrysler's management team to help Chrysler realize its full potential," Chrysler President Tom LaSorda said.

The deal breaks up a product lineup that yoked American mass-market brands Jeep, Dodge and Chrysler with Germany's premium Mercedes-Benz, luxury Maybach and Smart minicar brands at a time of wrenching restructuring for the U.S. auto industry.

The German company -- whose name will revert to Daimler AG if shareholders approve -- will contribute another 650 million euros to cover long-term liabilities at Chrysler, it said.

It estimated the deal will cut DaimlerChrysler's 2007 net profit by 3-4 billion euros.

"Even though I don't think there is a very strong valuation story, there is a very strong visibility story. One of the great parts of uncertainty surrounding Daimler is now not so uncertain," said Nomura analyst Michael Tyndall.

Union Welcomes Deal

A key factor contributing to the United Auto Workers' endorsement of the deal was that Cerberus didn't request concessions from the union, said Lebeau, who cited sources familiar with the talks.

The deal will not trigger any job cuts beyond the 13,000 Chrysler announced in February, when it unveiled a $1.5 billion 2006 operating loss as customers, spooked by high fuel prices, fled its lineup of pickup trucks and sport utility vehicles.

One key to the deal is the company's unfunded healthcare liabilities related to Chrysler's contracts with its UAW-represented factory workers. These stood at around 14.1 billion euros at the end of last year.

DaimlerChrysler said Chrysler would keep the liabilities.

UAW President Ron Gettelfinger, who sits on DaimlerChrysler's supervisory board and had publicly opposed a sale to a private equity buyer, hailed the deal.

"The transaction with Cerberus is in the best interests of our UAW members, the Chrysler Group and Daimler," he said.

Chrysler aims to return to profits in 2008. A main hurdle, analysts say, is its ability to clinch a new contract with the UAW that reduces costs, particularly for healthcare, when the current contract expires in September.

Cerberus Agrees to Buy Stake in Chrysler

"That unfunded healthcare really determines how much the business is worth," Nomura's Tyndall said, noting Bernhard, who used to be Chrysler's chief operating officer, was as well placed as any to have a clear view of this.

Bidders that publicly said they were vying for Chrysler are Kerkorian's Tracinda Corp. and Canadian autoparts maker Magna International. Private equity firm Blackstone Groupalso pursued Chrysler, and was said to be linked up with smaller buyout firm Centerbridge Partners.

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.

"It's the best sort of deal DaimlerChrysler could have got," Howard Wheeldon, senior strategist at BGC Partners, told "Worldwide Exchange," noting that DaimlerChrysler couldn't afford to keep throwing cash into the money-losing operation. Chrysler lost $1.5 billion last year.

"But Chrysler remains a company worth salvaging," Wheeldon said.

“If you take a look at historic valuations, there are a lot of reasons why (private equity) is doing what it’s doing,” Larry Smith, chief investment officer at Third Wave Global Investors, told CNBC’s Squawk on the Street. “Increasingly, a lot of the deals are indicative of large pools of money that are getting involved in situations that need to be turned around. This is no longer the traditional private equity where people put money in secure deals with positive cash flows. There’s a lot of money to be made if you can turn Chrysler around."