I can't help myself 
Cerberus buys Chrysler group for $7.45 billion
Bernhard won't have role in Chrysler management
Amy Wilson | Automotive News
May 14, 2007 - 5:18 am
UPDATED: 5/14/07 3:56 P.M.
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Reassembling Chrysler
New company formed -- Chrysler Holding LLC.
Cerberus Capital Management owns 80.1 percent of Chrysler Holding, Daimler AG owns 19.9 percent.
Cerberus pays $7.45 billion but most goes to Chrysler Holding. By paying off debt, Daimler has net cash payout of $650 million.
Chrysler Holding owns 100 percent of Chrysler Corp. LLC.
Chrysler Corp. is the maker and seller of cars and trucks, and controls Chrysler Financial Services LLC finance arm. It also holds all the pension and health care liabilities.
Tom LaSorda remains as CEO of Chrysler Corp and Eric Ridenour remains as COO.
Wolfgang Bernhard, an adviser to Cerberus, will not be part of Chrysler management.
UAW chief Ron Gettelfinger supports the deal. But CAW chief Buzz Hargrove is angry he wasn't included in the talks.
Deal is expected to close in third quarter.
Chrysler will once again chart its own course.
DaimlerChrysler said today that private equity group Cerberus Capital Management will take control of the Chrysler group in a deal valued at $7.45 billion (5.5 billion euros).
Under the terms, Cerberus will own 80.9 percent of a new company, Chrysler Holding LLC. DaimlerChrysler will retain 19.9 percent.
The deal ends the “merger of equals” that formed DaimlerChrysler in 1998 -- Daimler-Benz paid $36 billion to buy Chrysler -- and makes modern history by putting an automaker into the hands of private investors.
Cerberus won the bidding for Chrysler over proposals from private-equity firm Blackstone Group, investor Kirk Kerkorian and Canadian auto parts suppliers Magna International Inc.
DaimlerChrysler CEO Dieter Zetsche set off a scramble for Chrysler on Feb. 14 when he announced that the company would consider all options for Chrysler. At the same time, Chrysler announced a restructuring plan in the wake of a $1.5 billion loss in 2006.
Most of the $7.45 billion outlay from Cerberus will go directly to Chrysler Holding. Chrysler's automotive business will get $5 billion, while the financial services business gets $1.05 billion.
DaimlerChrysler will transfer the unit free of debt. Because of the cost of Chrysler's restructuring plan, the transaction will result in a cash outflow of $1.6 billion for DaimlerChrysler. DaimlerChrysler's net cash outflow resulting from the transaction will be $650 million.
Chrysler's pension and health care obligations will be retained by the Chrysler companies.
"We're confident that we've found the solution that will create the greatest overall value -- both for Daimler and Chrysler," Zetsche said in a prepared statement. "With this transaction, we have created the right conditions for a new start for Chrysler and Daimler."
UAW President Ron Gettelfinger said, "The transaction with Cerberus is in the best interests of our UAW members, the Chrysler Group and Daimler."
The transaction is expected to close during the third quarter of this year.
Analyst: 'Best investment'
"I know on paper they didn't get as good a price as people expected, but it will be the best investment Daimler ever made," said Adam Jonas, a Morgan Stanley analyst in London. "BMW paid a similar amount to get rid of Rover."
Jonas estimates that Daimler invested up to $70 billion in the Chrysler business during its nine years of ownership.
Zetsche acknowledged in a press conference today that executives "overestimated the potential of synergies" likely to come from the merged DaimlerChrysler. The anticipated lift to the Chrysler group's brand equity never materialized despite borrowing Daimler technology.
"The American volume customer is not willing and is probably not able to pay premium prices for premium technologies," Zetsche said.
No role for Bernhard
The deal puts a major U.S. automaker in the hands of a private equity group for the first time.
"Cerberus is the right strategic buyer for Chrysler, with a long-term commitment to Chrysler's growth and success. They are committed to working constructively with both union leadership and Chrysler's management team to help Chrysler realize its full potential," Chrysler CEO Tom LaSorda said.
He said the deal would not trigger job cuts beyond the 13,000 Chrysler announced in February as part of its restructuring plan.
Former Chrysler COO Wolfgang Bernhard, who had been hired by Cerberus as an adviser during the bidding process, will not take an active role in helping to restructure Chrysler, Cerberus said.
"He will not join the management team at Chrysler," Cerberus Chairman John Snow told a news conference.
Bernhard, a highly respected manager within the industry, ran the Volkswagen Brand group until the end of January.
Snow said Chrysler would benefit from dropping out of the public spotlight for a time.
"Our approach is fundamentally long term. We don't think about the next quarter. We don't think about what analysts have to say about us," he told a news conference in Stuttgart. "Our capital is patience."
Sale not dependent on UAW labor deal
The deal to sell the Chrysler group was not dependent on reaching a collective bargaining agreement with the UAW that would cut labor costs to a competitive level.
The sale is "not conditional on any aspects of a collective bargaining agreement," Zetsche told a conference call, adding that it was conditional on its supervisory board agreeing to the deal but this was a just a technicality.
CFO Bodo Uebber said the company would tender for legacy Chrysler bonds by the third quarter.
Reuters contributed to this report.
You may email Amy Wilson at
awilson@crain.com.
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Statement from Tom LaSorda, Chrysler Corp. CEO:
"We are confident that this transaction will create a standalone Chrysler that is financially stronger, with a winning combination of people, industry know-how, operational expertise and spirit of innovation that will accelerate the company's recovery, and help us regain our position as a competitive industry leader.
Cerberus is the right strategic buyer for Chrysler, with a long-term commitment to Chrysler's growth and success. They are committed to working constructively with both union leadership and Chrysler's management team to help Chrysler realize its full potential. There are no new job cuts planned in connection with this transaction announced today.
As a private company, Chrysler will be better positioned to focus on its long-term plan for recovery, rather than just short-term results. It will allow Chrysler to renew its focus on what has always made us special - our passion, creativity and commitment to delivering exciting Chrysler, Jeep and Dodge vehicles and quality Mopar parts to our customers, along with unparalleled customer service.
With strong backing from Cerberus and a continued relationship with Daimler, Chrysler must demonstrate once and for all that we can win in this global marketplace. It is ours to win. And Chrysler has it in its DNA to do just that."
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This is a press release from DaimlerChrysler:
PRESS RELEASE: Cerberus buys Chrysler
Cerberus Takes Over Majority Interest In Chrysler Group and Related Financial Services Business for $7.4 Billion From DaimlerChrysler
- Affiliate of Cerberus to acquire 80.1% equity interest in new company Chrysler Holding LLC; DaimlerChrysler AG to retain 19.9%
- Obligations for pensions and healthcare costs to be retained by Chrysler companies
- Transaction expected to result in net cash outflow of $0.65 billion for DaimlerChrysler
- DaimlerChrysler's net profit according to IFRS in 2007 to be reduced in a range of $4.1-5.4 billion
- Equity ratio of DaimlerChrysler's industrial business is expected to be over 40% by the beginning of 2008
- Extraordinary Shareholders' Meeting to decide on change of name to Daimler AG
- DaimlerChrysler CEO Dieter Zetsche on the realignment of DaimlerChrysler AG: "We will be the leading manufacturer of premium vehicles and a provider of premium services in every market segment we serve worldwide."
- UAW President Ron Gettelfinger: "The transaction with Cerberus is in the best interests of our UAW members, the Chrysler Group and Daimler."
- Cerberus Capital Management Chairman John Snow: "Cerberus believes in the inherent strength of U.S. manufacturing and of the U.S. auto industry. Most importantly, we believe in Chrysler."
STUTTGART, Germany -- The Board of Management of DaimlerChrysler AG has today decided, subject to the approval of the Supervisory Board and the relevant authorities, on the future concept for the Chrysler Group and the realignment of DaimlerChrysler AG. Completion of the transaction is subject to the satisfaction of customary closing conditions, including the receipt of regulatory approvals and Cerberus financing arrangements.
Structure of the transaction
-- An affiliate of private equity firm Cerberus Capital Management, L.P., New York, will make a capital contribution of $7.4 billion in return for an 80.1% equity interest in the future new company, Chrysler Holding LLC. DaimlerChrysler will hold a 19.9% equity interest in the new company. Chrysler Holding LLC will hold 100% each of the future Chrysler Corporation LLC, which produces and sells Chrysler, Dodge and Jeep® vehicles, and the future Chrysler Financial Services LLC, which provides financial services for these vehicles in the NAFTA region.
-- Of the total capital contribution of $7.4 billion, $5.0 billion will flow into the industrial business (Chrysler Corporation LLC) and $1.05 billion will flow into the financial services business in order to strengthen the equity base of both businesses. DaimlerChrysler will receive the balance of $1.35 billion. In addition, DaimlerChrysler will grant a loan of $0.4 billion to Chrysler Corporation LLC.
-- According to the agreement, upon the closing of the transaction, DaimlerChrysler will transfer the industrial business of the Chrysler Group completely free of debt. Due to the Chrysler Group's anticipated negative cash flow until closing in connection with its restructuring plan, the transaction will give rise to a cash outflow of $1.6 billion for DaimlerChrysler. The overall net cash outflow resulting from the transaction will therefore be $0.65 billion. In addition, DaimlerChrysler will have to discharge long-term liabilities of the Chrysler Group in connection with the transaction. This will result in prepayment compensation of approximately $878 million, to be borne by DaimlerChrysler. The usual transaction costs will also be incurred.
-- The Chrysler Group's financial obligations for pension and healthcare benefits towards its employees and the employees of the financial services business related to the Chrysler Group will be retained by the Chrysler companies. The pension plans are significantly over-funded at present.
Effects on key figures
The transaction will have the following effects on DaimlerChrysler AG:
-- In total, current estimates indicate that net profit according to IFRS in 2007 will be reduced by $4.1 billion to $5.4 billion.
-- Due to the deconsolidation of the Chrysler companies and the resulting reduction in the balance-sheet total, the equity ratio of DaimlerChrysler's industrial business is expected to increase to more than 40% by the beginning of 2008.
-- There will be no changes relating to the bonds issued and guaranteed by DaimlerChrysler AG. In the financial services business for the Chrysler, Jeep ® and Dodge brands, Cerberus will take over the financing previously provided by DaimlerChrysler AG.
-- The 19.9% equity interest held by DaimlerChrysler AG in the new company Chrysler Holding LLC will be included after closing at equity in the Van, Bus, Others segment.
-- The closing of the transaction is expected to take place in the third quarter of 2007.
Dr. Dieter Zetsche, Chairman of the Board of Management of DaimlerChrysler AG and Head of the Mercedes Car Group: "We're confident that we've found the solution that will create the greatest overall value - both for Daimler and Chrysler. With this transaction, we have created the right conditions for a new start for Chrysler and Daimler."
Ron Gettelfinger, President of the United Autoworkers (UAW): "The transaction with Cerberus is in the best interests of our UAW members, the Chrysler Group and Daimler. We are pleased that this decision has been made, because our members and the management can now focus entirely on the development and manufacture of quality products for the future of the Chrysler Group."
John W. Snow, Chairman of Cerberus Capital Management, L.P.: "We welcome Chrysler into the Cerberus family of companies and believe Cerberus will be a good home for Chrysler. Cerberus believes in the inherent strength of U.S. manufacturing and of the U.S. auto industry. Most importantly, we believe in Chrysler."
Snow continued: "We would like to thank DaimlerChrysler for their good stewardship of this American icon over the last decade. We are aware that Chrysler faces significant challenges, but we are confident that they can and will be overcome. A private investment firm like Cerberus will provide management with the opportunity to focus on their long-term plans rather than the pressures of short-term earnings expectations."
Business progress
In nearly ten years as DaimlerChrysler, a lot has been done to move the businesses forward. The synergies possible between Mercedes-Benz and Chrysler have been fully utilized. Additional potential for collaboration is limited between two businesses operating in such different market segments. The strong volatility and pressure on margins in the Chrysler Group's North American core market have an increasingly negative impact on DaimlerChrysler's overall profitability and share-price development.
The Chrysler Group has made substantial progress in recent years. For example, production hours per vehicle have fallen from 48 hours in 2001 to just over 30 at present. Quality has improved by more than 40% over the past six years. Since 2002, more than $10 billion has been invested in new production facilities and technologies. And with 34 new models since 2001, Chrysler has one of the youngest product lines in the industry.
Zetsche: "As a result, Chrysler today is structurally more sound than its North American based competitors. And with Cerberus as a partner, Chrysler will have the best chances of utilizing its full potential."
Ongoing collaboration
Existing projects with the Mercedes Car Group will be continued, for example in the development of conventional and alternative drive systems, purchasing, and sales and financial services outside the NAFTA region. Furthermore, a Joint Automotive Council will be established in which representatives of both sides will assess and decide on the potential of new and current projects. The Council will be led by board-level members from each company.
Zetsche: "We very much look forward to our continued cooperation as business partners, as we want to continue to reap the mutual benefits of working together. That's one of the reasons why we're retaining a 19.9% equity position in Chrysler."
New Daimler AG
Due to the new corporate structure, the name of DaimlerChrysler AG is to be changed to Daimler AG. A decision on this is to be taken by the shareholders at an Extraordinary Shareholders' Meeting probably in fall 2007.
The Board of Management of the new company will be reduced to six members. Tom LaSorda, Eric Ridenour and Tom Sidlik will leave the Board of Management with the Group's sincere thanks.
There will no longer be a separate board position for procurement in the new Daimler AG. In the future, all procurement activities will be directly coordinated between the divisions. Within the Board of Management, Bodo Uebber will additionally assume overall responsibility for procurement.
The leadership teams of the Mercedes Car Group, the Truck Group and Financial Services will remain unchanged, as will the teams in the vans and buses businesses.
Zetsche: "We've done our homework in our corporate functions and in all of our divisions. As a result of our strategic review, we have a well-defined roadmap to lead us into a good future."
The Mercedes Car Group will generate a return on sales of at least 7% this year, with higher rates to follow in the coming years.
The Truck Group will achieve an average return on sales of 7% over the cycle as of 2008. This represents a return on net assets of approximately 30%.
DaimlerChrysler is also a world leader and profitability benchmark for buses. And in the vans business, which is performing very well, the new Sprinter will continue the success story of its predecessor.
The Financial Services division aims to earn a return on equity of more than 14%.
Growth perspectives
Zetsche: "We have a strong starting position. We have an above-average financial power. And our future prospects are promising." The Group has defined the following main areas for continued growth:
-- Further expansion in the core business, which means in the traditional segments that are the most profitable and have the highest growth rates, as well as exploiting new market opportunities on a regional basis.
-- Continued development of innovative, customer-oriented and tailor-made services and activities, pursuing opportunities both up and down the value chain.
-- Strengthening leadership in sustainable, responsible and environmentally friendly technologies.
By focusing on these three areas, Daimler's full potential is to be exploited and enterprise value is to be increased further through profitable and sustainable growth. Daimler intends to do this on its own, while continuing to benefit from opportunities of scale with Chrysler.
Zetsche on Daimler's goals: "We will be the leading manufacturer of premium products and a provider of premium services in every market segment we serve worldwide. And we will pursue our commitment to excellence based on a common culture, a great heritage of innovation and pioneering achievements and - with Mercedes-Benz - the strongest automotive brand in the world.
Cerberus Capital Management, L.P., New York, is one of the largest private investment firms in the world, with approximately $23.5 billion under management in funds and accounts. Founded in 1992, Cerberus currently has significant investments in more than 50 companies that, in aggregate, generate more than $60 billion in annual revenues worldwide.
For the reader's convenience, the financial information has been translated from euros into US dollars at an assumed rate of EUR1 = $1.35. The convenience translation does not mean that the euro amounts actually represent the corresponding dollar amounts stated or that they could be converted into dollars at the assumed rate.
