DaimlerChrysler Nearing Deal to Sell U.S. Auto Unit

By Sholnn Freeman and Tomoeh Murakami Tse
Washington Post Staff Writers
Monday, May 14, 2007

DaimlerChrysler is closing in on the sale of Chrysler to the private financial firm Cerberus Capital Management in a deal expected to be announced as early as today. The sale would unravel a mega-merger of the 1990s and highlights the growing influence of private equity on American business.

Dieter Zetsche, DaimlerChrysler chairman, put Chrysler on the block in April, opening a high-stakes bidding war for the third-largest U.S. automaker. Chrysler is the kind of company that private-equity firms like to target: a distressed operation with strong cash flow and potential for turnaround.

Any agreement that places Chrysler in the hands of private equity is likely to unsettle Chrysler's U.S. labor unions, which have repeatedly denounced private-equity ownership as the "worst-case" scenario for the company.

Union leaders at the Canadian Auto Workers and the United Auto Workers, who were unavailable for comment late Sunday, have said in the past that they fear plant closings and job cuts on top of those sought in restructuring attempts over the past decade at Chrysler.

The sale could also jeopardize promises Chrysler has made over the years to pay workers' future health-care costs. Cutting the massive liability will be a big target for Detroit auto companies during contract negotiations this summer.

"One of the fears is that private equity is not what you would call a benevolent society for the preservation of jobs," said David E. Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich. "That' s one of the reasons there will be deep concern on the part of labor."

Under preliminary terms, a new company will be set up that will be 80 percent owned by Cerberus, while Daimler will retain a 20 percent stake, according to sources familiar with the deal who spoke on the condition of anonymity because negotiations were still underway. The new company would inherit Chrysler's $18 billion in debt associated with health-care costs for retirees.

As part of the deal, Tom LaSorda, Chrysler's Canadian-born chief executive, would remain in his current role, according to the sources. Even as a sale looms, LaSorda is leading the company through a massive overhaul that includes 13,000 job cuts. Wolfgang Bernhard, a former Mercedes executive who worked with Zetsche in an earlier attempt to overhaul Chrysler, may take a board seat at the new company. Bernhardt, known as one of the industry's top "car guys," has been working as an adviser to Cerberus.

It isn't clear how private-equity ownership would affect the future availability of models from the automaker, which are sold under the Chrysler, Jeep and Dodge brands.

Billionaire investor Kirk Kerkorian, Canadian auto parts maker Magna International and a private-equity team led by Blackstone Group were also pursuing Chrysler.

Private-equity firms have been the main drivers of the corporate mergers and acquisitions boom of the past several years. They have taken companies private with significant amounts of borrowed money, using assets of the target companies as collateral. Private-equity firms usually hold on to the companies for several months to several years, often bringing in new management, cutting costs and selling them for a profit.

With the global market awash in cash in a low-interest environment, some analysts say the flurry of leveraged buyouts will continue for a few years. With so much money chasing a shrinking number of deals, the beleaguered U.S. auto industry has caught the attention of some of the biggest names in private equity. Cerberus last year bought a 51 percent stake in GMAC, General Motors' finance unit.

Cerberus recently made a $1 billion bid to purchase Tower Automotive, a Michigan supplier. That deal has not closed. Cerberus was part of a consortium of investors that planned to invest $3.4 billion in Delphi Corp., an auto parts maker. But Delphi said Cerberus withdrew, though Cerberus has not confirmed that.

Among the Chrysler suitors, Magna appeared to have the backing of the Canadian Auto Workers based on the argument that another large industrial company in the automotive sector was best positioned to run Chrysler.

Under Zetsche, DaimlerChrysler officials have been engaged in an "all-options-open" review of Chrysler's future since February. German investors have been pleading with Zetsche to dump Chrysler and to do it as quickly as possible.

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