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Cerberus Purchase of Chrysler Signals New Era in Auto Industry

LCT Staff
Posted on May 16, 2007

DETROIT — By effectively agreeing to give away 80.1% of Chrysler Group to private-equity firm Cerberus Capital Management LP, German auto maker DaimlerChrysler AG has set the table for a potentially far-reaching restructuring of Detroit's faltering auto giants. The New York investment firm and the German auto company have set an ambitious goal: to work with the powerful United Auto Workers union to restructure the $18 billion that Detroit's No. 3 auto maker estimates it will eventually owe for UAW retiree health-care benefits. Daimler, Chrysler's German parent, was unwilling to shoulder that burden.

Many big airlines and steelmakers have chosen to file for Chapter 11 bankruptcy protection to reduce such liabilities. If Cerberus can devise a formula for doing so outside of bankruptcy court, Ford Motor Co. and General Motors Corp. would almost certainly try to follow suit, potentially affecting some $95 billion in total retiree health-care obligations. Discussions among Big Three executives are under way at "the highest levels," one person familiar with the situation says.

Daimler's deal with Cerberus, announced yesterday, represents a watershed moment for both the U.S. auto industry and the burgeoning private-equity sector that is transforming global finance. Detroit's Big Three have been struggling for years to cope with fierce global competition and rising retiree and health-care costs. Private-equity firms like Cerberus, which often buy public companies and slash costs, have amassed large war chests of capital and have been aiming for bigger and bigger targets. With Chrysler, Cerberus is betting that it can run one of the nation's largest industrial companies more effectively as a private company.

Cerberus appears to be betting on several things: that the U.S. economy will remain strong enough that consumers will spend freely; that Chrysler's negotiations with unions will be fruitful; and that the company will produce vehicles that consumers want. With stock-market valuations of $15.7 billion and $16.7 billion respectively, Ford and GM are potential targets for private-equity buyers, especially if their retiree health-care liabilities can be engineered to a more manageable size. Members of the Ford family, which controls 40% of Ford's shareholder voting power through a special Class B stock, met recently with investment bankers to discuss the future of their holdings. A lawyer for the family said yesterday the family isn't discussing the sale of any of its controlling stake. Last year, GM repelled an effort by Las Vegas billionaire Kirk Kerkorian to steer the company into an alliance with Nissan Motor Corp. and Renault SA. Although Mr. Kerkorian later sold his stake in GM, some analysts say GM could again become a target for private-equity investment.

Analysts expect Cerberus to consolidate Chrysler's consumer-finance business with GMAC Financial Services, a similar unit it previously purchased a controlling stake in from GM, which could result in job cuts. Cerberus, named after the three-headed dog of Greek mythology that guards the gates to the underworld, was founded in 1992 by Stephen Feinberg, a former Drexel Burnham Lambert executive. Until recently, it was best known for buying distressed debt in the U.S., Japan, South Korea, Germany, and elsewhere, then turning a profit by renegotiating or foreclosing on the loans. It also provided expensive financing to troubled companies. It has been especially active in the auto industry. Last year, it bought 51% of GMAC from GM. It recently bought parts maker Tower Automotive in a $1 billion deal, and it owns seating-fabric maker Guilford Mills and Peguform Group, a German-based manufacturer of plastic parts. Source: Wall Street Journal

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