Monday, May 14, 2007

Cerberus is Chrysler "Winner"

Well, you can read about this one just about anywhere today: private-equity firm Cerberus is buying Chrysler from DaimlerChrysler AG. I happened to find an interesting article in The Wall Street Journal.

The Journal reminded readers that Daimler-Benz paid $36 billion for Chrysler Group back in 1998. Even though Cerberus has committed $7.4 billion to this deal, Daimler will receive just $1.35 billion of that (although Daimler will retain nearly 20% ownership in Chrysler), as Cerberus will pump the remaining $6.05 billion into Chrysler's businesses. Furthermore, Daimler is expected to write checks totalling nearly $2.5 billion to exit Chrysler's money-losing business between now and the time the deal actually closes. That is a colossal loss of shareholder wealth perpetrated by Daimler over the past nine years. Whoops.

Which begs the question why Cerberus--or any other private equity firm for that matter--would want to own Chrysler. Private equity guys normally pay up for businesses that generate huge, recurring amounts of free cash flow. Last check, that description didn't fit the auto industry in general and certainly not Chrysler specifically. In addition to the $7.4 billion in cash Cerberus is putting into this deal, they'll also inherit Chrysler's roughly $18 billion in retirement and health-care liabilities.

To Cerberus' credit, they do own a stake in GMAC, so there may be some potential synergies between that business and Chrysler's financing arm. And Cerberus' rental car holdings include Alamo and National, which make significant vehicle purchases for their fleets.

Still, it'll be interesting to see how this one works out financially, and whether Cerberus can get better returns than Daimler did with its Chrysler investment.

2 comments: said...

You can't really call this a sale as Chrysler was just handed to Cerberus by Daimler.

It's an embarassment to Daimler and a humiliation to Chrysler.

Brendan Moore -

Dave said...

Good point.

Given the rise of the Korean manufacturers and the potential rise of Chinese manufacturers, you have to wonder if Chrysler is even viable in the long run. Will that brand still exist 10 or 20 years from now? It seems inevitable that one or two (at least) of the old US brands will die off.