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

 

Man I was hoping Magna would get the nod. But I guess that I wish Chrysler Holdings the best and they will get my buisness as well as my 2 sons buisness. I have owned Dodge or Plymouth cars all my life. Even when they were loosely called Chrysler from Japan. I own a TSI and a Stealth. But what I really wanted was a front engine, rear wheel drive. I also wanted style. Style of the early Challengers or Chargers. So this is my chance to own what I have been wanting for years. I hope Chrysler sells these cars they make now and Daimler goes the way of Studabaker. I hope they become most profitable. They are risking alot to bring us the cars we could only dream of and I will do my best to help them out . I will support them and their products.

 

(Warning: I'm in a very bad mood; therefore, my responses will be very negative about Daimler as I now rank them below Toyota my previous most disliked brand)

Good! Daimler is going to lose money. At least that helps lighten my mood about this whole situation. They are the reason why Chrysler is in this shape. They didn't want to operate Chrysler for the sake of what is good for Chrysler, they wanted to use Chrysler to help their economies of scale (produce more Mercedes junk to make each unit less expensive). Anytime Chrysler proved to be more innovative than MB, they acted like a bunch of rich, spoiled brats over it and destroyed Chrysler's work. They have almost succeeded in destroying Chrysler like they almost destroyed Mitsubishi. They are fools. They are going to go under if they don't get their heads straight on how to run this company.

I'm not happy about Cerberus getting them. Why would they want to take on something like this unless they are going to dismantle it? If they do run it, they will probably have accountants run it and we will have bland cars again like we had from Iaccoca's reign (I'm also pinning some of the blame on him for the merger because he let Eaton run Chrysler instead of Lutz because of a personal disagreement the two had with each other). What does Cerberus really know about how to manage a car company. GMAC is the financial end which they already understand, but this is a lot more complex. Magna would have been the best choice.

I'm going to stop here before I really start to say some controversial things.[sm=rant.gif]