Retooling for Chrysler

The Baltimore Sun

The marriage is over.

Daimler has divorced Chrysler, and there's a new groom in the wings, a private equity firm known for cutting its way to profit but vowing this time to retool and build.

To do so, New York-based Cerberus Capital Management is going to have to push hard for Chrysler to rebuild a lineup top-heavy with gas-guzzling large trucks, sport utility vehicles and V-8 powered sedans. Cerberus bid $7.4 billion for Chrysler, which will be split off from the existing DaimlerChrysler.

The new owner also is going to have to deal with a business now structured so that its operating costs put it at a disadvantage to its Japanese and South Korean competitors in the United States.

The deal will give Cerberus control of three iconic brands: Dodge, Jeep and Chrysler.

But the automaker has been losing money and market share to foreign competitors - it surrendered its No. 3 position in the United States last year to Japan's Toyota Motor Corp. - and needs to rethink its lineup and rework its union contracts to become competitive again.

The deal, the first in which a private equity firm will take control of a U.S. automaker, is expected to close in about three months.

While private investors typically "strip and flip" the assets of companies they buy to turn a quick profit, Cerberus will have to stick with Chrysler for the long run, analysts say.

Among other things, it can take three to four years to design, engineer and build a new or significantly revamped model, and Chrysler needs several of them.

"It's still a difficult task," said Jack R. Nerad, market analyst at Kelley Blue Book, based in Irvine, Calif.

"They're looking at very large pension and health-care obligations. 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.

The jury's still out on whether Cerberus can succeed, but several analysts said the company has a better chance now than if it were to continue as part of DaimlerChrysler, which was expected to announce this morning that its Chrysler unit lost as much as $1.2 billion in the first quarter because of the costs of its continuing restructuring.

One big advantage to 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.

"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.

The deal also calls for continuing 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.

Also on the plus side, Chrysler 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 the Jeep and the full-size rear-wheel drive cars" such as the Chrysler 300 and Dodge Magnum, said George Peterson, president of AutoPacific market research in Tustin, Calif.

"But they don't do well in the front-wheel-drive, mid-size car market. The Jeep Compass and Patriot, the Dodge Sebring, they're rental car plays, and Chrysler hasn't established the sort of product in those segments that's really desirable for the retail customer," Peterson said.

Chrysler posted a $1.46-billion loss last year as it continued pumping out its large pickups and sedans with fuel-thirsty V-8 engines long after soaring gas prices had damped auto buyers' enthusiasm for big vehicles.

Many of the company's vehicles in the mid-size segment are new or about to be redesigned and haven't had time to develop, or fail. 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.

"So 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 change the work force will become embittered, and that hurts production and quality."

DaimlerChrysler Chief Executive Officer Dieter Zetsche said in a news conference that the deal was not expected to increase the job cuts or plant closings announced by Chrysler President Thomas W. LaSorda as part of the automaker's restructuring. In addition, he said, the agreement with Cerberus is not conditioned on the outcome of contract negotiations this summer and fall with the UAW.

Some analysts insist that the deal's terms make it look less like a sale than a transaction in which Daimler is paying Cerberus to take a troubled Chrysler off its hands nine years after the then-Daimler-Benz paid $36 billion to acquire it.

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 cost to 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 health-care liabilities," said Craig Hutson, an auto industry analyst with corporate bond research firm Gimme Credit in New York.

Cerberus would gain an 80.1 percent stake in Chrysler, while Daimler - which will drop the "Chrysler" portion of its name - would retain a 19.9 percent share. In addition to the automotive organization, Cerberus also would gain control of Chrysler Financial, the company's captive lending arm.

John O' Dell writes for the Los Angeles Times.

DaimlerChrysler AG

Headquarters:

Stuttgart, Germany, and Auburn Hills, Mich.

Sales:

$200.1 billion for 2006

Employees:

382,000

Products:

4.4 million vehicles per year, including Mercedes and Maybach luxury cars, SUVs and commercial vehicles; Chrysler, Dodge and Jeep brands in United States; Smart compact cars; and Freightliner heavy trucks

Other businesses:

Owns 15 percent stake in European Aeronautic Defence & Space Co. NV, the parent company of plane maker Airbus. Affiliate Detroit Diesel makes medium and heavy-duty diesel engines.

[ Associated Press]

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