Video: Private equity to the rescue?

By Roland Jones Business news editor
msnbc.com
updated 5/15/2007 11:28:50 AM ET 2007-05-15T15:28:50
ANALYSIS

Monday's announcement that a private equity firm will pay $7.4 billion for a majority stake in DaimlerChrysler’s struggling Chrysler unit brings to an end a period of uncertainty for Detroit’s No. 3 automaker. But will the new owner, Cerberus Capital Management LP, be able to put the troubled automaker on the road to success?

The answer may hinge on the ability of Cerberus to manage Chrysler's union contracts.

Chrysler and the other Big Three automakers will begin negotiations with the powerful United Auto Workers union this summer to redraw their labor contracts. Chrysler’s relationship with its unions is at the heart of the deal with Cerberus, and a successful renegotiation of that relationship is key to the long-term survival of the automaker, analysts say.

Chrysler is saddled with $18 billion in retirement and health care costs for current and retired employees guaranteed by existing union contracts. Cerberus is taking on those obligations in its risky takeover deal.

General Motors, Ford and Chrysler all have struggled with these costs, which they argue leaves them at a disadvantage to Asian and European competitors who don’t face the same costs. Some argue that deeper union concessions are the only way the U.S. manufacturers can remain competitive.

“The albatross around their necks is their cost structure, and dealing with the unions,” said Scott Kays, president of Kay’s Financial. In order for American car companies to be more competitive with foreign automakers, he said, they need to reduce the $1,600 in costs for healthcare and pensions that comes out of every car they make, compared with $300 per car for Japanese rival Toyota.

“Unless concessions are made, they will have hard time competing,” Kays told CNBC Monday.

Last year, Ford and GM won concessions from the UAW, making union workers pay a share of their health insurance premiums, but Chrysler was not included in the deal. Under Cerberus management Chrysler is likely to push for parity with GM and Ford, said George Magliano, director of automotive industry research for the Americas at Global Insight.

“Cerberus can’t ask for more concessions than GM and Ford, and the union can’t say Chrysler can’t have the same as GM and Ford, and so my feeling is by the end of this negotiation period all three U.S. automakers will have similar deals in place, and they will have cost structures closer to their Asian rivals,” said Magliano. “In the end, both the unions and Detroit are fighting for survival.”

In the months leading up to Monday's announcement, union leaders had expressed concern about a sale of Chrysler to a private firm. In general, such firms often take failing companies and aggressively reorganize them, slashing costs and jobs in an effort to sell the companies  later for a profit.

Earlier this year UAW President Ron Gettelfinger warned that a private equity buyer would “strip and flip” the company by selling it off in pieces.

But Gettelfinger said Monday that after it was clear DaimlerChrysler was determined to sell the U.S. unit, he decided to embrace the Cerberus purchase. He will reportedly meet with Cerberus management on Tuesday.

“The decision has been made, we’re supportive of it,” Gettelfinger said on WJR-AM in Detroit. “We’re going to close that past chapter. We’re going to move forward.”

In reaching the deal for Chrysler, Cerberus apparently beat out billionaire investor Kirk Kerkorian and Canadian auto-parts supplier Magna International, both of whom were cited as interested suitors.

Analysts say Cerberus, which already has major interests in the auto industry, is well-positioned to tackle Chrysler's problems.

Cerberus owns auto sector companies like Guilford Mills, a textile maker for car seats, and is trying to buy parts maker Tower Automotive for $1 billion. Also, Cerberus’ automotive team includes former auto industry executives like David Thursfield, who ran Ford’s operations outside of North and South America, and Wolfgang Bernhard, who a former high-ranking executive at Daimler-Benz, Chrysler and Volkswagen.

Cerberus CEO and former Treasury Secretary John Snow said there “may be opportunities in the private sector […] that create more room for growth and expansion that will allow management to focus with greater intensity on the day-to-day business of producing better cars.”

For now, Cerberus is likely to push ahead with a restructuring plan laid out by Chrysler in February, analysts say. That plan called for cutting about 13,000 workers — 16 percent of its North American work force — over the next three years and return U.S. operations to profitability by 2008.

Some analysts say a Cerberus-owned Chrysler could move more aggressively to cut labor costs, trim Chrysler’s network of dealers and move investment to overseas markets.

At present, Chrysler’s footprint is limited to North America, although it recently sealed a deal with China’s Chery Automobile to build small cars to be sold worldwide.

In the United States, Chrysler’s product lineup is a pressing issue. It has been overly focused on pickup trucks and sport utility vehicles that are losing popularity to more fuel-efficient sedans — a market segment dominated by the Asian brands.

Chrysler has enjoyed success with a line of attention-grabbing muscle cars, including the revamped Dodge Charger and the burly and stylish 300 sedan, but more such success stories are needed, analysts say.

On the other hand, through the Cerberus deal Chrysler unwinds the controversial 1998 takeover of the American automaker by Daimler-Benz — a deal that set the mark for massive cross-border acquisitions and was seen as a colossal failure.

“The bottom line here is Chrysler is, or has been, a good company,” said Magliano. “It has done well with its products and has run a lean shop, but the issue for Chrysler has been the [Daimler-Benz] deal,” said George Magliano. “With the Big Three struggling, those in Germany who were against the deal to begin with saw an opportunity to get rid of it, and now someone else can worry about the $18 billion in retirement and health care costs and Chrysler can focus on getting its act together.”

The Associated Press contributed to this report.

Discuss:

Discussion comments

,

Most active discussions

  1. votes comments
  2. votes comments
  3. votes comments
  4. votes comments

Data: Latest rates in the US

Home equity rates View rates in your area
Home equity type Today +/- Chart
$30K HELOC FICO 4.40%
$30K home equity loan FICO 5.80%
$75K home equity loan FICO 4.54%
Credit card rates View more rates
Card type Today +/- Last Week
Low Interest Cards 13.70%
13.70%
Cash Back Cards 17.66%
17.91%
Rewards Cards 17.05%
17.17%
Source: Bankrate.com