Video: Fixing Chrysler

updated 8/3/2007 3:26:47 PM ET 2007-08-03T19:26:47

Chrysler became an American company again Friday as Cerberus Capital Management gained a controlling share from Chrysler’s German owners and started on the long road to restoring the 82-year-old automaker’s luster — and profits.

DaimlerChrysler AG transferred an 80.1 percent stake in Chrysler to New York-based Cerberus, one of the world’s largest private equity firms, in a $7.4 billion deal. The German automaker retained a 19.9 percent interest in the new company, Chrysler LLC.

“After months of uncertainty, then a period of transition, we are beginning a new chapter in Chrysler’s proud history — and we have the chance to write a terrific story,” Chrysler Chief Executive Tom LaSorda said in an e-mail to employees.

With the closing, Chrysler becomes the first U.S. automaker in private hands since Ford Motor Co. went public in 1956. Chrysler, which plans a companywide celebration Monday where it will revive its five-sided star logo, will be free of the short-term quarterly earnings pressures that public companies face, since there will be no Chrysler shares.

“Going private means we can bring laser-like focus to our business and make the long-term investments needed to compete,” LaSorda said.

DaimlerChrysler shares will become Daimler shares, but otherwise shareholders won’t be affected. DaimlerChrysler is to be renamed Daimler AG, a change that must be approved by shareholders at a meeting Oct. 4 in Berlin. In a letter to employees, Daimler Chairman and former Chrysler chief Dieter Zetsche said the company made the right decision.

“As a company we’ve become faster and overall more efficient,” he said. “Our balance sheet is strong.”

The sale ends the stormy nine-year marriage of Daimler and Chrysler, which merged in a $33 billion deal that was hailed as creating a global giant. Instead, Daimler found itself battered by rising pension and retiree health costs in the United States while its Mercedes brand faltered with quality problems at home.

While Chrysler made $1.8 billion in 2005, it lost $618 million in 2006. The losses brought on the sale and forced Chrysler to announce a plan to shed 13,000 hourly and salaried jobs in the U.S. and Canada by 2009.

Jim McTevia, a Detroit restructuring consultant, said Chrysler was in a precarious position before the deal.

“I really believe that had this not taken place, Chrysler would have ultimately been sold off in pieces,” he said. “I do think now that Chrysler has a very bright future.”

McTevia said Cerberus can bankroll Chrysler’s restructuring and help the automaker find new business overseas, where it has struggled. He said the market is closely watching Cerberus’s ambitious gamble.

“They’ve got a lot of money on the line, but even more important than money, they’ve got their reputation on the line,” he said. “You can rest assured they’ll leave no stone unturned.”

Cerberus Chairman John Snow said Cerberus plans to keep Chrysler’s management team in place and give it the freedom to implement its restructuring plan. Part of that plan is the introduction this month of the redesigned 2008 Dodge Caravan and Chrysler Town & Country minivans, which are critical products for Chrysler.

“We are excited about realizing this monumental opportunity to help bring an American automotive icon back to a path for profitability and long-term success,” Snow said Friday in a news release.

Former Chrysler executive Wolfgang Bernhard, a senior adviser to Cerberus, is expected to be named chairman of the board at Chrysler, but there was no announcement about Bernhard on Friday.

As part of the deal, Cerberus agreed to invest $6.1 billion in Chrysler and its financing arm and to pay DaimlerChrysler $1.4 billion.

Cerberus has agreed to take on most of the auto company’s approximately $18 billion in long-term retiree health care costs. The Pension Benefit Guaranty Corp., the federal agency that ensures private pensions, said Friday Daimler will pay $1 billion into Chrysler’s pension plan if it is terminated within five years. Chrysler also is contributing $200 million beyond the required minimums to its plan over five years.

Chrysler joins a growing stable of auto companies in Cerberus’s portfolio.

Cerberus owns a 51 percent stake in GMAC Financial Services. It also owns Guilford Mills, the largest automotive seating supplier in the United States, and Peguform Group, a German-based manufacturer of interior and exterior plastic parts used in autos. Earlier this week, it completed its acquisition of Novi-based auto supplier Tower Automotive LLC.

The deal hit some speed bumps last month when bankers marketing a $12 billion Chrysler debt sale to major institutional investors ran into turmoil in the mortgage industry that weakened demand for leveraged loans and high-yield debt.

With no investor appetite, seven banks led by JPMorgan Chase & Co. had to keep most of the debt on their books. The banks will front about $10 billion as a loan. They could come back to the market after the summer when investors are more active. Daimler will take on $1.5 billion in debt while Cerberus will take on $500 million.

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