DaimlerChrysler's announcement that its troubled U.S. division could be put up for sale made the past week a busy one for private-equity firms.
The company is considering a private buyout for Chrysler as an option, said a source with knowledge of DaimlerChrysler's plans, who spoke yesterday on condition of anonymity because of the sensitivity of the discussions.
Among the private-equity firms that have been mentioned as possible suitors are Apollo Management, which specializes in financially distressed companies, and Cerberus Capital Management, which has been heavily involved in deals for GM's troubled units. A Cerberus spokesman yesterday would neither deny nor confirm the firm's interest. Apollo did not return calls seeking comment.
Any deal to take Chrysler private could far exceed the record-topping buyouts of the past year, analysts said.
"You would have to be quite a large python to swallow this one," said David Healy, auto industry analyst at Burnham Securities.
That's not to say these buyout shops couldn't pull together a creative transaction or play a major role in providing financing for a deal, these analysts said. Chrysler is the kind of company that private-equity firms like to target: a distressed operation with strong cash flow and a potential for a turnaround.
But it also is weighed down with debt, including $55 billion from health-care and pension liabilities. That amount alone, which would have to be assumed by a buyer, exceeds the recent $39 billion purchase of Equity Office Properties Trust by Blackstone Group, which is the largest leveraged buyout in history.
Several analysts said the sale of Chrysler would hinge on whether a buyer could strike a deal with the United Auto Workers union during this year's contract negotiations to remove some of that debt. In advance of the talks, Detroit automakers are saying they want to move billions of dollars into tax-exempt government trust funds to take the costs off their books.
Chrysler and its investment bank, J.P. Morgan Chase, plan to offer detailed financial information for a select number of suitors, which includes a few automakers. But with massive amounts of capital at their disposal and the ability to raise debt easily, private- equity firms bring tremendous advantages to the table.
They also have become key players in the auto industry. In 2005, a consortium of firms led by the District-based Carlyle Group bought Hertz from Ford Motor for $15 billion. Cerberus was part of the group that bought the financing operations of General Motors and has proposed investing in its bankrupt former parts unit, Delphi.
The financing that private-equity firms can provide for ailing auto companies typically has very favorable terms and is unencumbered by federal regulation, said David Stowell, professor of finance at Northwestern University's Kellogg School of Management.
"These firms have become of critical importance to the automotive industry," he said. "I have very little doubt that Chrysler is the subject of dozens of private equity and hedge funds right now looking at whether to buy the whole company or pieces of the company. There's a lot of slicing and dicing scenarios out there right now."
When private-equity firms bid for a company, they typically offer more than the value of the company's shares and also assume its debt. It is difficult to say how much Chrysler could fetch since its value is intertwined with that of its parent company. But there's no question about Chrysler's size. It had more than $60 billion in revenue last year from the sale of nearly 3 million cars and trucks. Last week, it announced an annual operating loss of $1.48 billion.
Even if Chrysler's price is too high, private-equity firms also can play the role of dealmakers for other suitors.
Private-equity firms "would have a hard time doing a deal of that scale right now," said Colin C. Blaydon, director of the Center for Private Equity and Entrepreneurship at Dartmouth College. But many of them have funds that can provide favorable financing if Chrysler's capital structure is reorganized, he added.
If it really wants to sell Chrysler, DaimlerChrysler could keep some of the company's liabilities to make the deal more palatable, said Healy, the auto analyst.
"It really depends on how badly the parent company wants to get rid of it," Healy said. "When [DaimlerChrysler Chairman] Dieter Zetsche took over the company, he called himself Mr. Chrysler. I think in his heart he would like to keep it and make it work. He's under a lot of pressure from shareholders."