Monday, May 14, 2007

Daimler pays to back out of Chrysler (Financial Times)

By Richard Milne in Stuttgart and John Reed in London

Published: May 14 2007 10:19 | Last updated: May 14 2007 22:18

DaimlerChrysler paid $650m (£328m) to unwind its $35bn tie-up with Chrysler as the most high-profile transatlantic deal ended with the sale of the US carmaker to private equity on Monday.

Cerberus, the US private equity group, will pay $7.4bn, but most of that will be injected as new equity into the separated Chrysler group. Daimler will retain a 19.9 per cent stake but will end all responsibility for the $17.5bn in unfunded healthcare liabilities that had worried investors.

“The outcome is very good for Daimler shareholders,” said Stephen Cheetham, an analyst at Sanford Bernstein. “This may well be the strategic tin-opener for a big part of Detroit’s problems.”

The deal changed the competitive landscape in Detroit and led to a wave of optimism in the motor capital of the US. The share prices of the other Big Three US carmakers – General Motors and Ford – rose in anticipation.

Investors are excited by the prospects of a private equity-backed Chrysler taking a tough line in negotiations with the UAW trade union this summer, although Ron Gettelfinger, head of the UAW, welcomed the deal as the best for “our members, the Chrysler group and Daimler”. However, the Canadian car workers’ union said the deal was “very worrisome”.

Cerberus said it would stick to Daimler’s restructuring plans, under which 13,000 jobs are to be eliminated, but compulsory redundancies have been ruled out.

Tom LaSorda, head of Chrysler, will keep his job, while Wolfgang Bernhard, a former Chrysler chief operating officer, will advise him in his role as a consultant to Cerberus.

The move marks the end of the 1998 tie-up, which was hailed as a “marriage in heaven” that would change the face of the motor industry. However, Chrysler went through three financial crises, causing Daimler to lay off more than 40,000 workers.

The sale of Chrysler to private equity represents the disposal of one of the best-known US companies to the sector.

John Snow, the former US Treasury secretary and chairman of Cerberus, said: “Our approach is fundamentally long-term. Sometimes companies can do better outside the requirements of quarterly reporting.

“The leadership of Chrysler will then be able to focus all of their energy on running the business,” he added.

Dieter Zetsche, chief of Daimler, explained the decision to keep a stake in the company: “We basically have all the upside benefits without any risks.”

General Motors and Ford shares jumped on investors’ confidence that the arrival of a hard-nosed private-equity owner could mark a milestone in the turnround of the Detroit carmakers. GM closed 3.94 per cent higher at $30.62; Ford gained 4.06 per cent to end at $8.71 on Monday.

Under the deal, Daimler will receive $1.35bn from Cerberus but will contribute $2bn to the new company. It will no longer have obligations for the $29bn in currently overfunded pension liabilities. The deal will cause net profit to fall by €3bn-€4bn (£2.1bn-£2.7bn) in 2007. The rump company will be renamed Daimler AG, subject to shareholder approval, and will consist of the Mercedes luxury car group and the world’s largest truckmaker.

Analysts said that while Cerberus could have success with one of Detroit’s main problems – cost – it could struggle with the other: building cars that Americans actually want to drive.

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