Daimler pays to dump Chrysler
German automaker will end up actually paying $650 million to unload Chrysler to end its exposure to billions in ongoing losses, healthcare costs.

By Chris Isidore, CNNMoney.com senior writer
May 14 2007: 11:53 AM EDT
NEW YORK (CNNMoney.com) -- DaimlerChrysler moved to undo the most expensive and one of the least successful mergers in auto industry history Monday as it agreed to essentially pay to dump the money-losing Chrysler unit which it paid $37 billion for nine years ago.

DaimlerChrysler (Charts) announced it will sell an 80 percent stake in its U.S. brand to Cerberus Capital Management, a private equity investment firm that will pay $7.4 billion.

But the German automaker, which will be renamed simply Daimler, will not actually get most of the money that Cerberus is paying for the once proud automaker. Instead Cerberus will contribute $5 billion to the Chrysler auto operations it will now control, with just over another $1 billion going to Chrysler's finance arm.

While Daimler will receive the remaining $1.4 billion of Cerberus' capital contribution to the sale, Daimler expects to have to cover another $1.6 billion in Chrysler losses before the deal closes. So Daimler estimates that it will end up paying out about $650 million to close the deal, and that its earnings for 2007 will take a $4 billion to $5.4 billion profit hit due to charges related to the transaction.

What Daimler gains from the deal is closing the door on ongoing losses and liability for future health care costs, for Chrysler's unionized employees and retirees, estimated to be as high as $18 billion.

Shares of DaimlerChrysler were up 2.7 percent in late trading Frankfurt and up nearly 2 percent in late morning trading in New York, although that is off from earlier gains soon after the announcement. Even coming off the highs of the day, shares of the company have risen nearly 30 percent in the three months since it announced it was looking to sell Chrysler.

The private equity sector has become a major force in the acquisition of publicly owned companies in recent years, often buying troubled operations at a bargain price.

"We are aware that Chrysler faces significant challenges, but we are confident that they can and will be overcome," said a statement from John Snow, the chairman of Cerberus and the U.S. Treasury Secretary from 2003 to 2006. "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."

This is not Cerberus' first entry into the troubled U.S. auto industry. Last year it bought a 51 percent stake in GMAC, the finance unit of General Motors (Charts, Fortune 500), and it is in negotiations to become a major investor in Delphi (Charts, Fortune 500), the world's No. 1 auto parts maker which has been in bankruptcy since October 2005.

The German automaker then known as Daimler-Benz paid $37 billion for the U.S. automaker in 1998, but it soon found itself weighed down by uncompetitive labor costs and lost sales to nimbler Japanese rivals.

Toyota Motor (Charts) passed DaimlerChrysler in U.S. sales for the first time 2006, as GM, Ford Motor (Charts, Fortune 500) and Chrysler all lost money on their North American operations and announced plans to close plants and make deep cuts in staff.

The U.S.-based automakers such as Chrysler, which includes the Chrysler, Dodge and Jeep brands, have been hurt by high gasoline prices over the last year and a half; they depend much more on sales of light truck models such as SUVs, pickups and minivans, than on the more fuel efficient car models, where Japanese automakers dominate U.S. sales.

About three out of every four vehicles that Chrysler Group sells in the United States is a light truck, the highest percentage of any automaker. But sales