Monday, May 14, 2007
DaimlerChrysler today announced an agreement to sell an 80.1% stake in Chrysler to the private equity group Cerberus Capital Management. The transaction is structured as follows: an affiliate of private equity firm Cerberus will make a capital contribution of EUR 5.5 billion ($7.4 billion) in return for an 80.1% equity interest in a new holding company, Chrysler Holding LLC. DaimlerChrysler will hold a 19.9% equity interest in the new company. Chrysler Holding LLC will hold 100% each of the future Chrysler automotive operations and financial services business. Of the total capital contribution of EUR 5.5 billion, EUR 3.7 billion will flow into the automotive business and EUR 0.8 billion will flow into the financial services business. DaimlerChrysler will receive the balance of EUR 1.0 billion. In addition, DaimlerChrysler will grant a loan of EUR 0.3 billion to Chrysler Corporation LLC. Chrysler's healthcare and pension plan obligations, estimated to be $18 billion will travel with the new company. DaimlerChrysler will also hold a shareholders meeting in the Fall 2007 to rename itself Daimler AG.
Daimler will cover the losses of Chrysler group until the sale is completed. These loses are expected to be EUR 1.2 billion. In addition, DaimlerChrysler has agreed to discharge prepayment compensation of approximately EUR 650 million in connection with the transaction. It appears that Daimler will have a negative cash flow of EUR 1.15 billion in the deal (NB. The N.Y. Times has the figure at $678 million but looking at the press release I think my figure is the right one; the Wall Street Journal is closer). Daimler has accordingly agreed to pay Cerberus to take Chrysler and its significant pension and healthcare liabilities, a company it paid $36 billion for in 1998. How about that for a purchase price and deal gone bad?
One of the key conditions to completing a transaction will be the support of the United Auto Workers. I speculated yesterday that this might be a problem due to Cerberus's bad reputation with the UAW arising from its involvement in the Delphi bankruptcy. However, the DaimlerChrysler press release today contains the following quote from Ron Gettelfinger, President of the UAW:
The transaction with Cerberus is in the best interests of our UAW members, the Chrysler Group and Daimler. We are pleased that this decision has been made. Because our members and the management can now focus entirely on the development and manufacture of quality products for the future of the Chrysler Group.
As I've said before, I think there are significant closing risks due to the requirements of union agreement. However, the union statement above is encouraging though clearly here the devil is in the details of any arrangements to be negotiated. DaimlerChrysler is a German company and therefore subject to looser SEC filing restrictions. It remains to be seen if they will actually file the sale agreement, and only need do so if they are required to file the agreement with the German authorities. If it is filed, I will have more on any conditions to completion and the legal ramifications. For those who want a historical perspective, Dealscape has a nice timeline of the auction's main events.
So why did Daimler do this deal? And what is in it for Cerberus? Well, the transaction can only be viewed as a desperate maneuver by Daimler to clean up its balance sheet and improve cash flow. The value for Daimler lies in its soaring share price since the announcement of a possible sale. For Cerberus, it obtains a fire sale price and leverage to bargain with the unions. The value is in such reductions and possibly reduced agency costs due to Cerberus's direct and private oversight of Chrysler. In addition, Cerberus can obtain possible cost-savings and synergies by combining or jointly operating Chrysler's financial services arm with GMAC, General Motor's financial arm which Cerberus acquired a 51% stake in last year. Or perhaps Cerberus's value lies in the sale price: an unbelievably low price negotiated at the bottom of an auto market downturn.
And congratulations to my old law firm Shearman & Sterling, who represented DaimlerChrysler in the transaction.
Update: Dieter Zetsche, CEO of DaimlerChrysler, stated on a conference call today that “[t]his deal is not conditional on any aspects of collective bargaining,” which effectively means there is no condition in the Chrysler sale agreement for a renegotiation of the UAW contract on certain terms. Accordingly, any deal between the UAW and Cerberus will be achieved through the upcoming summer renegotiation of Chrysler's UAW contract.