US private equity group Cerberus inched closer to acquire Chrysler, the struggling US unit of Germany’s DaimlerChrysler, reports suggest. DaimlerChrysler is expected to declare on Monday a deal to sell a controlling stake in Chrysler Group, Detroit’s third largest auto maker, to private-equity firm Cerberus Capital Management, say people familiar with the on going negotiation. The anticipated agreement would permit the German auto giant to cast off Chrysler’s $18 billion in retirement and health-care liabilities and could open the possibility to further restructuring of the nation’s unionized auto makers. In case, if Cerberus is named the final bidder, which seems imminent now, it would be an impressive success for a private equity firm to take control of one of Detroit’s automakers and a massive blow to Canadian auto supplier Magna International Inc.
The expected next move would engage an extensive due diligence, as Cerberus further examines Chrysler’s inner workings and could get entangled in UAW negotiations this summer. Cerberus’ endeavor to purchase a leading stake in Delphi Corp., for example, has been put on hold by a failure to strike a lower-cost labor agreement with the union. Magna, the world’s third-largest auto supplier, had enjoyed the seeming front-runner position in recent weeks, locking up endorsements of crucial labor leaders who could have the influence to make such a deal work.
However, the recent development would definitely hit Canadian auto parts supplier Magna International as it had also been considered a contender on the strength of its relationship with Chrysler. Magna had raised speculation last week when it announced that a Russian industrial conglomerate, Basic Element, would invest $1.54 billion into the company. Some speculated that it was a last-minute effort to generate cash to buy Chrysler Group. The Blackstone Group and Centerbridge Capital Partners had also submitted bids. Billionaire Kirk Kerkorian made a $4.5-billion all-cash offer last month. Reports suggest that the deal price is expected to be well below the $36 billion the former Daimler-Benz paid for Chrysler Corp. in 1998.
Nevertheless, the possibility of private ownership alarms Chrysler’s labor unions, which have come out strongly against the sale of the company, fearful that an investor might try to break up the company or seek deep cuts in wages and benefits. According to the reports, under the terms and condition of the agreement being discussed, DaimlerChrysler might keep about a 20 percent stake in Chrysler and would be freed from nearly $20 billion in pension and health care liabilities for Chrysler’s present and retired workers. The liability would be transferred to a new company controlled by Cerberus.
Cerberus has a background of reducing costs at operations it acquires, and some experts say that a Cerberus-controlled Chrysler could move much more aggressively to slash labor costs, tighten up Chrysler’s crowded dealer network in the US and move investment to developing markets overseas. However, any final deal for Chrysler also depends on what happens this summer, when the United Auto Workers starts negotiations for new master contracts with all three Detroit auto companies.
In the meanwhile, The Financial Times of London has reported that the issue will be brought up at the DaimlerChrysler supervisory board meeting early this week and that it is not yet a done deal, mentioning unnamed sources that said Magna could be back in the running. A separate report suggested that Magna had been in recent talks with DaimlerChrysler officials.
