Chrysler Group might be sold to private equity firm

The Baltimore Sun

DETROIT -- DaimlerChrysler appears ready to sell a controlling interest in the struggling Chrysler Group to Cerberus Capital Management, a private equity firm, people with direct knowledge of the discussions said yesterday.

The deal, which would unwind the 1998 trans-Atlantic merger between Daimler-Benz and Chrysler, could be announced as soon as today, these people said. They insisted on confidentiality because of the sensitive nature of the talks.

It would conclude three months of discussions that have taken place since DaimlerChrysler announced in February that it was keeping all its options open for Chrysler, including a sale or finding a partner to run the company.

Chrysler lost $1.5 billion in 2006, prompting DaimlerChrysler to announce a restructuring plan for Chrysler, the second such plan in the past seven years. Under the latest turnaround plan, which calls for the company to cut 13,000 jobs, Chrysler is not expected to be profitable again until 2009. DaimlerChrysler is set to announce its first-quarter results tomorrow.

Cerberus emerged as the leading bidder for Chrysler late last week, bankers involved in the transaction said. Over the past few days, officials of both Cerberus and DaimlerChrysler have been involved in detailed discussions.

Details of the transaction, including the selling price, were not immediately available. Daimler-Benz acquired Chrysler in 1998 in a $36 billion deal that was originally portrayed as a "merger of equals" but turned out to be a takeover of the American company by the German one.

Cerberus is expected to invest several billion dollars in Chrysler over the next five years. In turn, DaimlerChrysler would retain an interest in 20 percent to 30 percent of Chrysler, in part to safeguard joint purchasing and vehicle development programs that the two companies share.

A number of complexities must be solved for the arrangement to go through, including how Chrysler's $18 billion liability for pensions and health care benefits for its current and future workers would be accounted for, people close to the discussions said.

Another big question is how Chrysler's unions, including the United Automobile Workers and the Canadian Automobile Workers, would react to the sale of a substantial stake in Chrysler. Leaders of both those unions have said they oppose the sale of Chrysler and want to see it remain as part of DaimlerChrysler.

But that option seems unlikely, should the transaction go through. Along with Cerberus, other interested bidders in Chrysler included two other private investment firms: the Blackstone Group, which was exploring a purchase in conjunction with Centerbridge Partners.

Magna International, the Canadian auto parts company, and the Tracinda Corp., the holding company owned by the billionaire Kirk Kerkorian, also said they had made bids for Chrysler.

If the sale goes through, DaimlerChrysler is likely to create a separate corporation encompassing Chrysler and take a minority stake. Cerberus is likely to keep Chrysler's management in place, at least for the time being, people close to the discussions said. Chrysler's former president, Wolfgang Bernhard, who advised Cerberus, might receive a seat on the board of the new Chrysler.

Bernhard has visited Chrysler several times in the past few weeks, and has remained friendly with DaimlerChrysler's chief executive, Dieter Zetsche, who held the comparable post at Chrysler when Bernhard was president.

A sale to Cerberus would be the company's latest investment in an automotive-related company. Last year, Cerberus headed a consortium that purchased a 51 percent stake in the General Motors Acceptance Corp., the financing arm of General Motors.

Cerberus also reached a tentative agreement to invest in the Delphi Corp., GM's former parts supplier, which is operating in bankruptcy.

It is not clear whether DaimlerChrysler would revert to the old Daimler-Benz name or come up with a new identity for itself.

A deal with Cerberus "puts an enormous amount of pressure on the union," said David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich. The UAW had tried to discourage a sale of Chrysler, although officials had conceded that they would prefer Magna over a private equity firm. The UAW thought private equity "would be the end of the world, and in some ways it probably would be," Cole said. "The union is in a horrifying box right now. There's got to be some real hardball that's a part of this to get the rank and file to go along with it."

In wading into Chrysler's troubled financial waters, Cerberus will find itself at home.

Founded by Stephen A. Feinberg in 1992 with $10 million, Cerberus has made its name by acquiring distressed companies and turning them around, reaping substantial profits.

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