Chrysler sold to Cerberus for $7.4B

By Elizabeth Strott

Three months to the day after DaimlerChrysler (DCX, news, msgs)announced that "all options" were on the table for its struggling U.S. Chrysler unit, private-equity firm Cerberus Capital Management said it would buy an 80.1% stake in Chrysler for $7.41 billion.

"We're confident that we've found the solution that will create the greatest overall value -- both for Daimler and Chrysler," CEO Dieter Zetsche said in a prepared statement today. "With this transaction, we have created the right conditions for a new start for Chrysler and Daimler."

Cerberus beat out two other bidders: a partnership between rival private-equity players Blackstone Group and Centerbridge Capital Partners, and Canadian auto-parts maker Magna International (MGA, news, msgs).

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Shares of DaimlerChrysler jumped $2.12, or more than 2.6% to close at $84.12; the stock has risen 20% since Zetsche announced the company's restructuring plans in February.

The deal is expected to close in the third quarter. Daimler will maintain a 19.9% stake in the new company.

Good deal for Daimler?

The Cerberus deal is a good one for DaimlerChrysler, said Kevin Tynan, an auto analyst at Argus Research.

"The expectation is that Cerberus will do some cutting and slashing to try to make it leaner and then turn around and selling it," Tynan said. "And Daimler will benefit from that by retaining about 20% of the company. What they got is pretty good."

The first big change: the company's name. The new company will be called Chrysler Holding, with the former German parent changing its name to Daimler, pending a special shareholders meeting in the fall.

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"We are confident that this transaction will create a stand-alone Chrysler that is financially stronger, with a winning combination of people, industry know-how, operational expertise and spirit of innovation that will accelerate the company's recovery, and help us regain our position as a competitive industry leader," Chrysler CEO Tom LaSorda said.

Daimler-Benz spent $36 billion for Chrysler in 1998 in what was then called a "merger of equals." Today's announcement unwinds what turned into a very unhappy marriage.

"I think Daimler's thrilled to get rid" of Chrysler, and "auto workers will be happy to have it back in American hands," Richard Steinberg of Steinberg Global Asset Management told CNBC.

Disgruntled shareholders have been pushing DaimlerChrysler to unload its U.S. arm after the parent company reported a $1.5 billion loss for 2006.

How did Cerberus win?

Cerberus was the most attractive suitor for several reasons.

"From DaimlerChrysler's standpoint, it's purely about who could put the most cash in their pockets the fastest," Dan Luria, an analyst for the Michigan Manufacturing Technology Institute, told Bloomberg News. "Cerberus clearly has deep pockets."

A key factor in the deal wasn't the price tag but what to do with Chrysler's $18 billion in pension and health-care liabilities.

DaimlerChrysler said Cerberus would not take on any Chrysler debt but would be responsible for its pension and health-care costs. Chrysler, like other U.S. auto makers, has been weighed down by massive obligations to its workers.

Cerberus also gave itself an edge by hiring Chrysler's former chief operating officer, Wolfgang Bernhard, as an adviser.

The private-equity firm said it will invest $5 billion in the new company, with $1.45 billion going to DaimlerChrysler -- which, in turn, said it would invest $600 million in the new Chrysler company.

Cerberus will also invest $1.05 billion in Chrysler's financial arm -- an attractive synergy for the private-equity firm, which already has 51% stake in GMAC, General Motors' (GM, news, msgs) financing business.

Magna never the front-runner

The news contradicts recent reports from German papers that suggested that Magna was the only bidder left for Chrysler. Just last week, Magna announced that Russian billionaire Oleg Deripaska had bought a $1.54 billion stake in the company, and Magna Chairman Frank Stronach said the investment by Deripaska would make the company a more attractive bidder for Chrysler.

But then a few days later Magna told German newspaper Frankfurter Allgemeine Zeitung that it only wants a minority stake in Chrysler. Magna had already identified Canadian investment firm Onex as one partner in its fight for Chrysler.

Magna, which had confirmed its interest in a potential purchase of Chrysler on April 13, had been expected to offer between $4.6 billion and $4.7 billion for the unit. DaimlerChrysler is one of Magna's biggest customers.

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