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Daimler and Chrysler split

Shake on it: Cerberus and DaimlerChrysler execs yesterday.

Sold! DaimlerChrysler becomes Daimler as German giant offloads its US partner

Chrysler logo15 May 2007

THERE will be no immediate change to the corporate operations of DaimlerChrysler Australia/Pacific following last night’s announcement that the unprofitable Chrysler Group will be sold to New York private equity company Cerberus Capital Management LP for $US7.4 billion ($A8.95 billion).

The German automotive giant, which purchased the struggling American vehicle manufacturer in 1998 for a record $A43 billion, will retain a 19.9 per cent share in the new company, Chrysler Holding LLC, while an affiliate of Cerberus will gain a majority 80.1 per cent stake – along with Chrysler’s sizeable staff pension and healthcare liabilities.

"Our information is that outside NAFTA (the North American Free Trade Agreement region) there are no changes planned," the senior manager corporate communications for DCAP, David McCarthy, told GoAuto.

"That’s not to say some changes may eventually take place, but the reality is that international is working well. We believe this is an overwhelmingly positive outcome for both Daimler and Chrysler." The most obvious result of the ownership split is a change in name for one of the world’s oldest car-makers.

Pending the approval of shareholders, DaimlerChrysler AG will become known simply as Daimler AG, rather than reverting to Daimler-Benz AG - the company’s long-time name before its marriage with Chrysler.

Despite the fact the two entities have failed to integrate as smoothly as promised through increased economies of scale, DCX has also announced that existing projects with the Mercedes Car Group will be continued, including the development of conventional and alternative drive systems, purchasing, sales and financial services outside North America.

A Joint Automotive Council will be established in which representatives of both parties will "assess and decide on the potential of new and current projects".

The council will be led by board-level members from each company, with the Board of Management of the new company reduced to six members following the departure of Chrysler president Tom LaSorda, Eric Ridenour and Tom Sidlik.

There will be no change to the leadership teams of the Mercedes car, truck, bus, van and financial groups.

"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 per cent equity position in Chrysler," said DaimlerChrysler CEO Dieter Zetsche, who headed the Chrysler Group before taking the top job last year.

"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." DCX expects the deal to be completed by the third quarter and that it would reduce its overall profit by at least $A4.89 billion to about $A6.52 billion for 2007.

A former opponent of Chrysler’s sale, United Auto Workers president Ron Gettelfinger, who had previously warned that a private equity buyer would slash jobs and costs before selling the company off in pieces, has applauded the new arrangement.

"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," he said.

Mr Gettelfinder said he was convinced by Mr Zetsche and Mr LaSorda during a meeting on Monday that it was the best option.

"Furthermore the process of selecting the preferred investor for the Chrysler Group was fully explained. We are satisfied now that the decision has been made so that our membership and management can focus on designing, engineering and manufacturing the finest quality products for the future success of the Chrysler Group." It’s believed Cerberus intends to combine the operations of both Chrysler Financial Services and General Motors Acceptance Corp, in which it purchased a majority stake from GM last year via a consortium.

"We welcome Chrysler into the Cerberus family of companies and believe Cerberus will be a good home for Chrysler," said Cerberus chairman John Snow. "Most importantly, we believe in Chrysler." The deal makes the Chrysler Group, which produces Chrysler, Dodge and Jeep vehicle and is the third-largest US car-maker behind General Motors and Ford - the only privately owned major American vehicle manufacturer.

Cerberus is the winning bidder from a number of prospective Chrysler owners following nearly three months of studies and negotiations over DaimlerChrysler’s US affiliate, which lost $A1.8 billion last year and will shed 13,000 workers as part of a long-term restructure.

They included General Motors, billionaire US investor Kirk Kerkorian, who failed to assume control of Chrysler in 1995 before the DCX merger, and Canadian vehicle component supplier Magna International, which is believed to have offered $A5.6 billion in April.

In a complicated arrangement, DaimlerChrysler said that of the total capital contribution of $A8.95 billion, $A6 billion will flow into the industrial business (Chrysler Corporation LLC) and $A1.3 billion will flow into the financial services business in order to strengthen the equity base of both businesses.

"DaimlerChrysler will receive the balance of EUR 1.0 billion ($A1.3 billion). In addition, DaimlerChrysler will grant a loan of EUR 0.3 billion ($A488 million) 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 EUR 1.2 billion ($A1.95 billion) for DaimlerChrysler.

"The overall net cash outflow resulting from the transaction will therefore be EUR 0.5 billion ($A810 million).

"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 EUR 650 million ($A1 billion), to be borne by DaimlerChrysler." DaimlerChrysler says that since 2002 more than $A10 billion has been invested in new production facilities and technology, during which time production hours per vehicle have fallen from 48 to just over 30 hours.

According to DCX, quality has also improved by more than 40 per cent during the period and that, with 34 models launched since 2001, Chrysler has one of the youngest product lines in the industry.

"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," said Mr Zetsche.

For its part, DCX says its car, truck and financial departments are in good shape.

The Mercedes car Group is expected to generate a return on sales of at least seven per cent in 2007 – the same figure forecast to be achieved by the Truck Group by 2008 – while the Financial Services division aims to earn a return on equity of more than 14 per cent.

"We will be the leading manufacturer of premium products and a provider of premium services in every market segment we serve worldwide," said Mr Zetsche.

"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."

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