Chrysler Profit Plummets 37% : Earnings: Poor first quarter may hamper Kerkorian’s search for takeover financing.
Chrysler Corp., the target of a hostile takeover attempt by billionaire Kirk Kerkorian, put out some bad news about its earnings Thursday--but it wasn’t all bad.
The auto maker said its first-quarter profit plunged 37% from a year ago, the first time in two years that its three-month earnings have dropped. The flip side is that the poorer financial performance may help the company resist Kerkorian’s unwanted offer.
The reason is that the lower earnings reflect slowing sales, a trend that is part of an approaching cyclical downturn in the auto industry, many analysts believe. And that may make it harder for an unwanted acquirer such as Kerkorian to raise takeover financing.
Chrysler’s stock slipped 87.5 cents to close at $47.875 on the New York Stock Exchange. For the second consecutive day, it was the most heavily traded stock, with more than 12 million shares changing hands.
Analysts said the lackluster performance Thursday--a contrast to the frenzied 25% share price rise the day before--reflected profit taking along with skepticism about the deal’s prospects.
“Some profit taking is reasonable after Wednesday’s big gain,” said Ronald Glantz, an analyst for Dean Witter Reynolds in San Francisco. The stock rose $9.50 to $48.75 Wednesday. The heavy trading came in the wake of the $55-a-share proposal that Kerkorian made Wednesday to acquire the 90% of Chrysler stock he does not already own. If completed, the $22.8-billion deal would be the second-largest in U.S. history.
The proposal teams up two corporate legends: the 77-year-old Kerkorian, whose Tracinda Corp. owns the MGM Grand Hotel and Casino in Las Vegas, and his 70-year-old friend and investment partner, former Chrysler Chairman Lee Iacocca.
Their proposal was rejected late Wednesday by Chrysler’s board. Robert Eaton, Chrysler chairman and chief executive, reiterated Thursday that the company is not for sale, though he added that its board will evaluate all offers.
“We have never been out shopping this company, and I don’t want anyone to believe that there is a for-sale sign out there,” Eaton said at a news conference to announce plans for a $750-million engine plant in Detroit.
He declined further comment on the takeover bid. Kerkorian and his representatives did not return phone calls for comment.
On Wall Street, analysts said there is growing doubt about the Kerkorian proposal as many investors remain skeptical that the offer will succeed. There is also concern about the leveraged nature of the proposed deal, which could leave the industrial concern burdened with too much debt.
“The skepticism will not go away until we know who his partners are, where they are getting their financing and what their plan is for the company,” said Michael Schroeder, an analyst with First International Asset Management in Naples, Fla.
Kerkorian, who is already Chrysler’s biggest stockholder, proposed buying the company using $5 billion in investor capital, $5.5 billion in excess company funds and $12 billion in financed capital. The investor capital includes $2 billion in stock already owned by Kerkorian and Iacocca.
Besides questions about the financing, there is worry that such a huge and complex transaction could be easily derailed. The company has anti-takeover provisions in place that could tie the deal up. The unions could object and the federal government could closely scrutinize it.
The acquisition could also be easily upset by outside events, such as even weaker auto sales, higher interest rates, higher oil prices and even product missteps.
This concern was highlighted by Chrysler’s first-quarter earnings, which company officials said reflect a slowing national economy. “There is no question that sales are a little softer,” Eaton said.
Chrysler reported net earnings of $592 million in the first three months of 1995, compared to a net profit of $938 million in the first quarter of 1994. The earnings slipped even though revenue rose 3%.
In addition to slower sales, the company said, it was hit by high expenses for the launch of its 1996 minivan, a $115-million charge to replace latches on older minivans, higher materials costs and a sharp drop in Mexican sales.
Chrysler officials went out of their way Thursday to point out negative trends affecting the company, prompting analysts to speculate that they were trying to paint a dark picture of the industry’s direction to discourage banks from providing financing to Kerkorian.
“They may be trying to scare the banks away,” said Nicholas Lobaccaro, analyst for S.G. Warburg in New York.
The auto maker had $7.3 billion in cash on hand at the end of the quarter, down from $7.6 billion at year’s end. The company has a target reserve of $7.5 billion to help it through the next recession.
This cash reserve is one focal point of the takeover battle with Kerkorian, who would like to tap about 70% of the rainy-day fund for the buyout. That would leave Chrysler $2 billion to cope with an economic downturn.
Jim Donlon, Chrysler’s controller, said the company’s cash on hand fell slightly in the quarter because of a higher dividend payment, profit sharing paid to employees and the repurchase of stock.
The company spent about $369 million to buy back its own stock in the first quarter. The purchases are part of a $1-billion buyback program in announced in December, in part to satisfy complaints from Kerkorian that Chrysler’s stock is undervalued in the market.
* DEAL MAKERS AVAILABLE
The cash is there for suitors. D2
* TAKEOVER LEXICON
Poison pills explained. D2
