In the bidding contest against the Blackstone Group and Canada's Magna International Inc., Cerberus offered the best terms, DaimlerChrysler AG CEO Dieter Zetsche divulged. The proposal private-equity firm Cerberus Capital Management is offering covers a swift deal and the least risks to the German automaker. The deal was agreed to by Daimler's management board early today and hinges on supervisory board approval.
But the company signaled that it already had the support of the board's labor representatives, who account for half of its 20 members. "The outcome of this supervisory board meeting is easy to forecast," Zetsche said.
Zetsche and Chrysler CEO Tom LaSorda visited Auburn Hills for town hall meeting to discuss the $7.4 billion sale of Chrysler to Cerberus. Daimler earlier confirmed that it will sell the Chrysler Group to Cerberus for $7.4 billion. The act will eventually result to the dissolution of the 1998 merger which was struck with high hopes but failed to live up to expectations. The separation of the two automakers will serve as a that is aimed at setting free unwanted emissions to bolster auto performance.
The automaker said that Daimler will still retain a 19.9 percent stake in the Auburn Hills automaker, while Cerberus will own 80.1 percent of the new company - Chrysler Holding LLC. Daimler said that its decision to retain a stake in Chrysler reflects its plans to continue existing projects between Chrysler and Mercedes, such as joint drive train development and purchasing.
The payment of the private-equity firm will go into Chrysler's auto-making operations and not to Daimler. Additionally, just over $1 billion has been allocated for its financial services operations. Under the terms of the deal, Daimler will absorb Chrysler's debts, while Cerberus will assume responsibility for its pension and healthcare liabilities.
"We're confident that we've found the solution that will create the greatest overall value - both for Daimler and Chrysler," Zetsche said at a news conference in Stuttgart, Germany. "With this transaction, we have created the right conditions for a new start for Chrysler and Daimler."
Zetsche also said that he thought Chrysler had a better chance of building up its business under private-equity ownership, shielded from the pressure of analysts and investors focused on short-term returns. But in an email sent earlier to Chrysler employees, their former boss said that the decision was not easy. "Given my experience with and commitment to Chrysler, this was a difficult task for me personally," said Zetsche, who ran the U.S. automaker for nearly five years and led its last turnaround.
Under the terms of the sale transaction, Daimler will get $1.3 billion of Cerberus's payment. But it still expects to pay out around $650 million in cash, partly to cover Chrysler's cash requirements until the transaction is finalized sometime in the third quarter of this year. Chrysler's current CEO Tom LaSorda will continue to head Chrysler under the new owners.
The Stuttgart, Germany-based automaker, called Daimler-Benz prior to the 1998 merger, said it would rename itself as Daimler AG. Its shares surged about eight percent in early trading in Frankfurt on relief that Daimler was not paying out more to dispose of Chrysler and that it had dropped the pension and healthcare liabilities. Daimler said that the pension liabilities are substantially over-funded but the healthcare liabilities amount to $18 billion. However, the shares came off their highs as investors took profits on the widely anticipated announcement.
Daimler shares have increased by 30 percent since Zetsche announced in February that the company was considering all options for Chrysler, including a sale, after the American division slid into the red last year.
Joining Zetsche in Stuttgart is Cerberus Chairman John Snow. Snow said Chrysler's management, will be relieved from the pressure of impatient shareholders and quarterly results under private ownership. "The leadership of Chrysler will be able to focus all their energy and all their efforts in running the business," Snow said. "We'll take Chrysler and restore it to the first ranks of the U.S. and global auto industry."
Cerberus, which owns a majority stake in GMAC Financial Services and other automotive interests, power up its bid by retaining Chrysler's former chief operating officer, Wolfgang Bernhard. Snow said that Bernhard would not join Chrysler's management team but would continue as an adviser to Cerberus. "He and Mr. LaSorda will work well together as they've done in the past," he confirms.
Ron Gettelfinger, the president of the United Auto Workers (UAW) and a member of the supervisory board, endorsed the deal in a statement issued by the UAW. "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," he added.
During a call with analysts, Zetsche said that no further job cuts were envisaged at Chrysler as a result of the deal. As part of a restructuring plan announced in February, the company already is slashing 13,000 positions. Asked why he thought the merger hadn't worked out, Zetsche said it was clear, in hindsight, that the potential synergies between Chrysler and Mercedes-Benz, the German luxury carmaker, had been overestimated.
"There is potential, but given the very different nature of the segments we operate in, those synergies are limited," he said. In addition, Daimler miscalculated the effect of the transfer of Mercedes technology to Chrysler's brands and the strength of its pricing. "The American volume customer is probably not willing and able to pay premium prices for technology offered in those cars," he noted.
In the third quarter, around the time the Chrysler sale is expected to close, Daimler will call an extraordinary shareholders' meeting to vote to change the company's name to Daimler AG. "We will be the leading manufacturer of premium vehicles and a provider of premium services in every market segment we serve worldwide," Zetsche said, commenting on the German company's future direction.
Asked whether Daimler might be susceptible to a takeover bid, Zetsche said that the company had been more vulnerable six months ago when the shares were slightly over half the current levels. "We are much more in control of our destiny than we were half a year ago," he said.
Analysts predict further gains in the German automaker's shares. They are expected to profit from a premium assigned by financial markets to luxury automakers. They are viewed as more flexible to industry's cycle.
Christian Breitsprecher, an auto analyst working at the BHF Bank, set a target price Monday of 90 euros for the stock, which closed at 61.72 euros after the sale was announced. Even after its big, recent gains, "it is clear that the stock remains undervalued," Breitsprecher stressed.
A joint automotive council made up of board-level executives from the two automakers will be established to assess new and current projects. "Dieter and I, being great friends for seven years, will help that," said LaSorda. In his note to employees, Zetsche commended them for the automaker's productivity and quality gains. "I'm confident that Chrysler will come back strong as it has done so many times in its long history."
