Long haul ahead for Chrysler’s buyer
The marriage is over, the love long gone: Daimler officially divorced Chrysler on Monday, in effect paying $650 million to get a new groom to take on a bride with whom it never quite bonded.
In confirming its bid to buy money-losing Chrysler Group, private equity firm Cerberus Capital Management has embarked on what looms as one of the most difficult turnaround jobs in U.S. industry.
The price was right for Cerberus -- officially $7.4 billion for the Chrysler, Dodge and Jeep brands, with most of that being poured into reviving the business. Under terms of the deal, DaimlerChrysler would lay out hundreds of millions for closing costs and other fees, in effect paying for the privilege of offloading the American company that it acquired for $36 billion only nine years ago.
The challenge for Cerberus’ moneymen in New York and their new team is to try to succeed where the auto insiders in Michigan and Germany have failed -- and try to reconnect with American buyers who are increasingly watching their wallets while grimacing at the pump.
For Cerberus, the key will be to reconfigure a lineup that is top-heavy with gas-guzzling large pickups, sport utility vehicles and V-8-powered sedans and learn to succeed with smaller, more fuel-efficient models.
It can take three to four years just to design, engineer and build a single new or significantly revamped model. How long would it take Cerberus to turn around an entire auto portfolio? No one knows, given that the deal would be the first in which a private equity fund will take control of a U.S. automaker.
Cerberus, with $16 billion in capital and $25 billion under management, would have to show skeptics that it can dig in for the long haul -- or certainly a much longer period than such “strip-and-flip” equity groups typically spend in turning around distressed properties.
One big advantage of the sale to a private investor is that “they no longer have to meet Wall Street demands” for ever-increasing quarterly growth, said Jesse Toprak, senior industry analyst at online automotive data provider Edmunds.com in Santa Monica.
“They can focus solely on getting profitable. They can cut unprofitable models from their lineup, reduce the number of dealerships and keep cutting back rental fleet sales” that make little money for the company and hurt the resale value of its used cars, he said.
Any new owner, private or otherwise, would have to deal with a business whose operating costs put it at a disadvantage to its Japanese and South Korean competitors in the U.S.
In addition, Chrysler is carrying on its books $19 billion in unfunded future liabilities for healthcare for its retirees.
“They’re looking at very large pension and healthcare obligations,” said Jack R. Nerad, market analyst at Irvine-based Kelley Blue Book.
“If they are working at a $1,000-per-car competitive disadvantage to the import competitors because of that, then they are going to have to be more productive and make their cars more compelling so they can command some sort of premium in the market,” Nerad said.
DaimlerChrysler Chief Executive Dieter Zetsche said at a news conference Monday at company headquarters in Stuttgart, Germany, that the deal was not expected to increase the dramatic scaling back of the business previously announced by Chrysler President Tom LaSorda.
Zetsche said the deal, which the parties hope to close in the third quarter, was not conditioned on the outcome of contract negotiations with the United Auto Workers union that begin this summer.
The sale was prompted by angry DaimlerChrysler investors in Germany who saw the combination of the companies in 1998 as a distraction that watered down the Mercedes-Benz brand’s quality and dragged down the value of DaimlerChrysler’s stock.
“It is remarkable that the ‘marriage made in heaven’ now is divorced by the hellhound of the ancient Greek mythology, Cerberus,” said Uwe Treckmann, an analyst at Dresdner Bank in Frankfurt, Germany, referring to the origin of the equity group’s name.
No matter what Cerberus does, turning Chrysler around is not a process that would be accomplished overnight.
One factor in Cerberus’ favor is that Chrysler has already launched a major new housecleaning aimed at eliminating 13,000 North American manufacturing and salaried jobs and shutting several factories. That’s after trimming 24,000 jobs from its payroll since 2001.
Those are cost-cutting moves Cerberus won’t have to make, freeing the company to concentrate on improving Chrysler’s operating efficiencies and its vehicle portfolio.
For its investment, Cerberus would gain control of three brands that, despite their recent woes, remain among the most iconic names in the industry. The product lineup includes such reliably strong sellers as the Chrysler 300 sedan, the Dodge Charger sports sedan and the Jeep Wrangler.
The deal calls for joint projects of Chrysler and Daimler’s Mercedes-Benz -- including work on clean diesels and more fuel-efficient gasoline and hybrid gas-electric powertrains -- to go forward. That’s a big plus for Chrysler, which will benefit from Daimler’s engineering prowess, Toprak said.
Chrysler already has acknowledged the failings in its lineup and begun to develop new small cars and fuel-efficient engines to help it weather the changing market.
“They do minivans and full-size pickups very well, and they have Jeep and the full-size rear-wheel-drive cars” such as the Chrysler 300 and the Dodge Magnum, said George Peterson, president of market research firm AutoPacific Inc. in Tustin.
Chrysler posted a $1.46-billion loss last year as it continued pumping out its large pickups and sedans long after soaring gas prices had damped auto buyers’ enthusiasm for big vehicles.
Today, DaimlerChrysler is expected to report a first-quarter loss for the Chrysler unit of as much as $1.2 billion, mainly related to the costs of the continuing reorganization.
Many of the company’s vehicles in the mid-size segment are new or about to be redesigned, though, and haven’t had time to develop. Dodge’s Durango SUV and the Ram 1500 full-size pickup are the oldest products in the portfolio, not due for a redesign until 2009.
“Cerberus is getting a company with a product plan that’s moving forward,” Peterson said. “A lot of what happens next depends on how they exert control, what happens to employee morale and attitude. If Cerberus starts doing draconian cutbacks, there’s a good chance the workforce will become embittered, and that hurts production and quality.”
Although Cerberus is ponying up all those billions, most of the money will be pumped directly into the new Chrysler Corp.’s automotive and financial operations.
Only $1.35 billion would go directly to Daimler, which in turn would lend Chrysler $400 million and pay a variety of closing costs and other fees that would result in a net outflow from the German automaker of $650 million.
“In effect, Daimler is paying Cerberus to assume the risk of owning Chrysler and its $19 billion of underfunded healthcare liabilities,” said Craig Hutson, an auto industry analyst with corporate bond research firm Gimme Credit in New York.
Cerberus would gain an 80.1% stake in Chrysler, and Daimler -- which would drop the “Chrysler” portion of its present name -- would retain a 19.9% share. In addition to the automotive organization, Cerberus also would gain control of Chrysler Financial, the company’s captive lending arm.
That could be a crucial component of the deal, suggested Tulane University finance professor Peter Ricchiuti, a former Wall Street broker and an equity market specialist.
“If they can somehow combine a lot of the operations of Chrysler Financial with GMAC,” the former GM finance unit that Cerberus also controls, the savings “would help make a difference” between failure and success, Ricchiuti said.
Times staff writer Christian Retzlaff in Berlin contributed to this report.
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By the numbers
Amount Daimler paid for Chrysler in 1998
$36 billion
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Amount paid by Cerberus for an 80% stake in Chrysler on Monday
$7.4 billion
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Amount Daimler will get from the sale to Cerberus*
$1.35 billion
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*Of the $7.4 billion, $5 billion will go to Chrysler’s industrial business and $1.05 billion to Chrysler’s financial business. A loan to Chrysler, closing fees and other costs would offset the $1.35 billion due DaimlerChrysler, resulting in a net outflow from the German automaker of $650 million.
Source: Times research
