News that billionaire investor Kirk Kerkorian is prepared to pay $4.5 billion for Chrysler pushed the troubled U.S. automaker’s stock price to its highest point since July Thursday. Such a transaction, if it were to come to pass, could also have a positive effect on the world’s fifth-largest automaker, analysts say.
Tracinda is the first suitor to publicly confirm its interest in the U.S. subsidiary of Germany’s DaimlerChrysler, which has struggled in recent years as American buyers have flocked to more fuel-efficient vehicles and the U.S. automaker’s product mix has relied too heavily on sales of more profitable, but less fuel efficient, sport utility vehicles and pickup trucks.
On Feb. 14 this year, in an effort to revive its fortunes, Chrysler announced plans to cut about 13,000 workers — 16 percent of its North American work force — over the next three years to return its U.S. operations to profitability by 2008, following similar shake-ups at U.S. rivals General Motors and Ford. Chrysler also indicated that a sale of the Chrysler unit was under consideration.
Since then, rumors have swirled swirling around Detroit about possible buyers of the Auburn Hills, Michigan-based Chrysler, including rival General Motors and Canadian auto-parts supplier Magna International, which has reportedly submitted a bid to buy the business for as much as $4.7 billion. Sources close to the situation have told Reuters that private equity groups Cerberus Capital Management and Blackstone Group are possible candidates to take over Chrysler.
Kerkorian’s offer, which was outlined in a letter to DaimlerChrysler’s supervisory board, may be the most enticing for Chrysler according to George Magliano, director of automotive industry research for the Americas at Global Insight, as it is contingent on Chrysler working out a favorable labor contract with the United Auto Workers union and offers the UAW and Chrysler management the opportunity to participate as equity partners in the deal.
“This offer a real blockbuster move — it has a lot going for it,” Magliano told CNBC, noting that Kerkorian has shown he is interested in keeping Chrysler running for the long haul and isn’t interested in breaking the company up into parts, which many have speculated would be the motive of private equity investors.
“He’s trying to get the union involved and the thing is contingent on, I assume, give-backs from the union — that’s the hidden kicker,” he added. “So it’s a very attractive offer and it really has a lot of momentum going for it right now.”
In a letter to DaimlerChrysler’s Chairman Dieter Zetsche, Kerkorian aide Jerry York said Tracinda plans to take a “very long term approach to solving Chrysler’s problems,” ignoring the company’s financial results over an initial five, six or seven year period “it will likely take to build Chrysler into a robust and lasting, stand-alone entity.”
The letter also said Tracinda would offer a substantial portion of equity in the company to the UAW as part of finding a solution to high healthcare costs, which is one of the biggest problems big U.S. automakers like Chrysler, General Motors and Ford face, as they are locked into contracts that force them to pay for healthcare for employees, retirees and their dependents — a cost that adds some $1,000 to the cost of every car they make.
A deal with the UAW union would be a revolutionary move for Kerkorian and the automotive industry, observers say. There are good examples of unions working with company management, most notably in the airline industry, where pilots and flight attendants have helped their employers avoid bankruptcy by agreeing to wage concessions, but such a move has never been seen in the automotive industry, which faces similar problems.
Tracinda told CNBC Thursday that there is “genuine interest in the leadership of the UAW about an equity stake in Chrysler.”
A deal with the UAW could be difficult for Kerkorian to pull off because of his turbulent history with Chrysler and the size of the company’s large legacy costs noted David Healy, an analyst with Burnham Securities.
“I’m not sure what Kirk brings to the party except he can’t help himself when it comes to playing with Chrysler,” he said.
However, David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich., said any deal would require an arrangement with labor on the legacy costs and noted that Tracinda adviser Jerome York has a long history of working with the UAW.
Russell Phillips, union steward for UAW Local 1700, said word of a possible sale began filtering through the Sterling Heights, Mich., assembly plant Thursday afternoon. Phillips, a 20-year Chrysler employee, said he thinks the UAW would be interested in listening to an offer from Tracinda.
“It would be very interesting if we can get something like that so we can help our members,” Phillips said. “A lot will depend on how open they are going to be with the UAW and if they really are willing to sit down and talk with us.”
DaimlerChrysler shareholders are hoping for a sale of the money-losing Chrysler unit, which has struggled to integrate with its German parent since their union in 1998. This week, the company’s board acknowledged that an outright sale was among the options being considered.
“As announced on Feb. 14, we are open to all options for future collaboration with Chrysler,” Chairman Dieter Zetsche told some 7,900 shareholders at a meeting Wednesday inside Berlin’s exhibition center. “The statement is still true today,” he added, noting that there had been with “potential partners who have shown a clear interest,” although he did not name them, saying only that “so far, I am satisfied with the process. Everything is going according to plan.”
Kerkorian, who made his fortune investing in Las Vegas property, has long been an active investor in automakers. The outspoken investor, who owns nearly 10 percent of GM and was a vocal critic of its board, suggested a three-way alliance between GM, Nissan and Renault last summer, reportedly impatient with the pace of GM’s turnaround plan.
After considering the plan for nearly three months, GM rebuffed its largest shareholder and announced that there would be no deal. Kerkorian hit back by abruptly canceling a plan to boost his stake in GM and recalled Jerome York, a representative from his Tracinda investment vehicle, from GM’s board.
A Chrysler deal would put Kerkorian, 89, in charge of Chrysler a decade after he claims he was tricked out of potentially billions of dollars in the 1998 deal in which DaimlerBenz combined with Chrysler. In 1995, Kerkorian made a hostile, $22.8 billion offer for Chrysler, only to be rebuffed and see it combine with the German automaker.
DaimlerChrysler shares climbed $3.81, or 4.7 percent, to close at $84.80 on the New York Stock Exchange Thursday after rising to a new 52-week high of $84.90 earlier in the session.