Cerberus Capital Management has taken over a majority interest in Chrysler Group and its related financial services business for $7.4bn from DaimlerChrysler, the two companies announced early on Monday.
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An affiliate of Cerberus is to acquire an 80.1% equity interest in new company Chrysler Holding LLC while DaimlerChrysler retains 19.9%. The two companies will continue to work together on some vehicle projects.
Obligations for pensions and healthcare costs are to be retained by Chrysler companies and the transaction is expected to result in net cash outflow of $0.65 bn for DaimlerChrysler.
DaimlerChrysler’s net profit according to IFRS accounting standards in 2007 will be reduced to a range of $4.1-5.4bn.
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By GlobalDataThe equity ratio of DaimlerChrysler’s industrial business is expected to be over 40% by the beginning of 2008.
An extraordinary shareholders’ meeting will decide on a change of DaimlerChrysler’s name to Daimler AG. The new company will operate with a smaller maangement board than at present.
The United Auto Workers (UAW) had been expected to oppose the deal, fearing job cuts. UAW president, Ron Gettelfinger, has accused private equity companies of stripping assets and downsizing troubled companies. Cerberus recently dropped out of a consortium bidding to acquire Delphi, at least partly because of a clash with unions.
But a DC/Cerberus statement cited Gettelfinger as saying: “The transaction with Cerberus is in the best interests of our UAW members, the Chrysler Group and Daimler.
“We are pleased that this decision has been made, because our members and the management can now focus entirely on the development and manufacture of quality products for the future of the Chrysler Group.”
Earlier this year Cerberus acquired 61% of GMAC Financial Services, GM’s former vehicle financing unit. It is expected to merger Chrysler’s financing arm into GMAC.
Cerberus Capital Management, LP, New York, is one of the largest private investment firms in the world, with approximately $23.5bn under management in funds and accounts. Founded in 1992, Cerberus currently has significant investments in more than 50 companies that, in aggregate, generate more than $60bn in annual revenues worldwide.
DaimlerChrysler CEO Dieter Zetsche said: “We [Daimler AG] will be the leading manufacturer of premium vehicles and a provider of premium services in every market segment we serve worldwide.”
Cerberus Capital Management chairman John Snow said: “Cerberus believes in the inherent strength of US manufacturing and of the US auto industry. Most importantly, we believe in Chrysler.”
A press conference in Stuttgart is scheduled for 2pm local time on Monday.
Chrysler Holding will hold 100% each of the future Chrysler Corporation LLC, which produces and sells Chrysler, Dodge and Jeep vehicles, and the future Chrysler Financial Services LLC, which provides financial services for these vehicles in the NAFTA region.
Of the total capital contribution of $7.4bn, $5.0bn will flow into the industrial business (Chrysler Corporation LLC) and $1.05bn into the financial services business in order to strengthen the equity base of both businesses.
DaimlerChrysler will receive the balance of $1.35bn. In addition, DaimlerChrysler will provide a loan of $0.4bn to Chrysler Corporation.
Tom LaSorda, president and CEO, Chrysler Group, said: “We are confident that this transaction will create a standalone Chrysler that is financially stronger, with a winning combination of people, industry know-how, operational expertise and spirit of innovation that will accelerate the company’s recovery, and help us regain our position as a competitive industry leader.
“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 realise its full potential. There are no new job cuts planned in connection with this transaction announced today.
“As a private company, Chrysler will be better positioned to focus on its long-term plan for recovery, rather than just short-term results. It will allow Chrysler to renew its focus on what has always made us special – our passion, creativity and commitment to delivering exciting Chrysler, Jeep and Dodge vehicles and quality Mopar parts to our customers, along with unparalleled customer service.
“With strong backing from Cerberus and a continued relationship with Daimler, Chrysler must demonstrate once and for all that we can win in this global marketplace. It is ours to win. And Chrysler has it in its DNA to do just that.”
According to the agreement, upon the closing of the transaction, DaimlerChrysler will transfer the industrial business of the Chrysler Group completely free of debt. Due to the Chrysler Group’s anticipated negative cash flow until closing in connection with its restructuring plan, the transaction will give rise to a cash outflow of $1.6bn for DaimlerChrysler. The overall net cash outflow resulting from the transaction will therefore be $0.65bn.
In addition, DaimlerChrysler will have to discharge long-term liabilities of the Chrysler Group in connection with the transaction. This will result in prepayment compensation of approximately $878m, to be borne by DaimlerChrysler. The usual transaction costs will also be incurred.
The Chrysler Group’s financial obligations for pension and healthcare benefits towards its employees and the employees of the financial services business related to the Chrysler Group will be retained by the Chrysler companies. The pension plans are significantly over-funded at present.
In the financial services business for the Chrysler, Jeep and Dodge brands, Cerberus will take over the financing previously provided by DaimlerChrysler.
The 19.9% equity interest held by DaimlerChrysler in the new company Chrysler Holding will be included after closing at equity in the van, bus, others segment.
The transaction is expected to close in the third quarter of 2007.
Zetsche added: “We’re confident that we’ve found the solution that will create the greatest overall value – both for Daimler and Chrysler. With this transaction, we have created the right conditions for a new start for Chrysler and Daimler.”
Snow added: “We welcome Chrysler into the Cerberus family of companies and believe Cerberus will be a good home for Chrysler.
He continued: “We would like to thank DaimlerChrysler for their good stewardship of this American icon over the last decade. We are aware that Chrysler faces significant challenges, but we are confident that they can and will be overcome.
“A private investment firm like Cerberus will provide management with the opportunity to focus on their long-term plans rather than the pressures of short-term earnings expectations.”
DaimlerChrysler said the synergies possible between Mercedes-Benz and Chrysler have been fully utilised and noted that “additional potential for collaboration is limited between two businesses operating in such different market segments.
“The strong volatility and pressure on margins in the Chrysler Group’s North American core market have an increasingly negative impact on DaimlerChrysler’s overall profitability and share-price development.”
DC said Chrysler had made substantial progress in recent years – production hours per vehicle have fallen from 48 hours in 2001 to just over 30 at present. Quality has improved by more than 40% over the past six years. Since 2002, more than $10bn has been invested in new production facilities and technologies. And with 34 new models since 2001, Chrysler has one of the youngest product lines in the industry.
Zetsche said: “As a result, Chrysler today is structurally more sound than its North American based competitors. And with Cerberus as a partner, Chrysler will have the best chances of utilising its full potential.”
Existing projects with the Mercedes Car Group will be continued, for example in the development of conventional and alternative drive systems, purchasing, and sales and financial services outside the NAFTA region.
A joint automotive council will be established in which representatives of both sides will assess and decide on the potential of new and current projects. The council will be led by board-level members from each company.
Zetsche: “We very much look forward to our continued cooperation as business partners, as we want to continue to reap the mutual benefits of working together. That’s one of the reasons why we’re retaining a 19.9% equity position in Chrysler.”
