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So far Cerberus can’t turn Chrysler around

/ Source: The Associated Press

After running Chrysler LLC for a year, Cerberus Capital Management LP must be wondering if its mascot, the three-headed dog that guards the gates of hell, is protecting it from the underworld or leading it into the flames.

Since the private equity firm bought 80.1 percent of Chrysler from the former DaimlerChrysler AG one year ago this week, little has gone right. Gasoline spiked to $4 per gallon, driving people away from the trucks and sport utility vehicles that dominate Chrysler's lineup. Consumers were spooked by a weak economy, the U.S. housing market went belly-up, and credit markets tightened, limiting Chrysler's ability to borrow. U.S. auto sales are down 11 percent this year and aren't expected to improve soon.

"Their timing is horrendous," said Gerald Meyers, a former chairman of American Motors Corp. who now teaches leadership at the University of Michigan. "They couldn't have picked a worse time to get into the automobile business domestically."

The troubles are mounting. Chrysler's sales are down 23 percent so far this year, the worst drop of any major automaker, and it has stopped offering leases through its financial arm because of falling truck and SUV values.

At the same time, Chrysler Financial only renewed $24 billion of its $30 billion in credit lines, which will hurt Chrysler's ability to provide loans to buyers and dealers. Fitch Ratings has downgraded Chrysler further into junk territory, saying it expects the company's finances to fall to the minimum levels required to fund its operations as early as next year.

Chrysler puts a positive spin on the headlines. The maker of Town & Country minivans, Dodge Ram pickups and Jeep Wranglers would not make any executives available for this story, but in a conference call to announce July sales last week, Vice Chairman and President Jim Press said a company should be judged by how it performs when times are tough.

"The strongest steel comes from the hottest fire, and while this is like dancing on the sun, we're making significant improvements in our business," said Press, who was lured from Toyota Motor Corp. to lead Chrysler's marketing.

Last fall, Chrysler negotiated a new contract with the United Auto Workers union that's expected to save billions in retiree health care costs and manufacturing wages. It has announced partnerships with Asian automakers that could help expand its small-car lineup and its global reach — something Chrysler desperately needs since it relies on trucks, SUVs and crossovers for nearly three-quarters of its sales. And it recently tied with industry leader Toyota for North American manufacturing productivity, according to the influential Harbour Report.

The Auburn Hills, Mich.-based automaker says it's performing ahead of its own expectations, with $11.7 billion in cash on hand at the end of June and earnings of $1.1 billion in the first half of the year before interest, taxes, depreciation and amortization. That means it is making money from its core business of making and selling cars, but before financial obligations like paying taxes, servicing debt, deducting the value of aging assets and recording expenses that are taken over time.

As a privately held company, Chrysler isn't required to release financial information, and it didn't provide its net income or other details. Daimler AG, which owns the remaining 19.9 percent of Chrysler, indicated through its own financial results last month that Chrysler lost an estimated $510 million in the first quarter.

Chrysler cites significant job cuts and asset sales as some of the reasons it is exceeding its targets — it has announced plans to cut 29,000 hourly, salaried and temporary jobs over the last 18 months. But JPMorgan auto analyst Himanshu Patel estimates that Chrysler will burn through nearly $4 billion this year.

The tumult has led to rampant speculation about what's ahead.

Aaron Bragman, an auto analyst with the consulting company Global Insight, said Chrysler may be releasing financial information to make it look healthier to potential bidders. Other analysts have suggested Chrysler Financial's exit from leasing is aimed at making the unit more attractive to buyers.

Even if a sale isn't on the horizon, Bragman said, Chrysler has so few products in its pipeline that it's hard to see a turnaround plan besides relying on partnerships to add small cars to its lineup.

Chrysler spokesman Rick Deneau said the automaker is introducing six products this year. None, however, is a smaller, more fuel-efficient car like buyers have been demanding, although two are hybrid SUVs. By comparison, 18 of the 19 new vehicles General Motors Corp. says are coming by 2010 are cars or crossovers.

It's harder for Chrysler to justify the expense of developing new products, Bragman said, because its market is so limited to North America, so it can't sell as many. Sixty-five percent of GM's sales come from outside North America, while just 9 percent of Chrysler's do.

Meyers suspects Cerberus will eventually sell pieces of the company to get some of its cash back, perhaps to a Chinese automaker eager to enter the U.S. market. For its stake in Chrysler, Cerberus agreed to invest $6.1 billion in the automaker and its financing arm and to pay Daimler $1.4 billion.

"The impatient money has become even more impatient, and Cerberus is an impatient money company. How long can they tolerate negative cash flow?" Meyers said. "I wish I could be more optimistic, but I don't see any daylight here."

Chrysler has denied a sell-off is in the works. In June, Chrysler Chairman and CEO Bob Nardelli, who was brought in by Cerberus after a controversial stint at Home Depot Inc., said he expects Chrysler will still be an independent company three years from now, and that Cerberus isn't second-guessing its investment.

Louis Lataif, dean of the school of management at Boston University and a former Ford Motor Co. executive, said he believes Cerberus can be more patient than a public company, which has large institutional shareholders that demand a quick return on their investment.

"I doubt seriously as an outsider that they were planning a quick spin here," he said.

At the very least, Bragman said, it's probably better that Chrysler is in the hands of Cerberus and not Daimler, which has problems of its own as European sales slide. The German company likely would have faced significant pressure from shareholders to kill Chrysler's brands or dump them for even less than Cerberus paid. Daimler paid $36 billion for Chrysler in 1998.

"It may be that they sold Chrysler as possibly the best moment they could for their own health," Bragman said.

Kevin Beltz, the owner of a Dodge dealership in Indianapolis, blames Daimler for the poor model lineup that was approved during the companies' rocky marriage. He praised Chrysler's new attention to the nuts and bolts, like improving the cheap image in the cars' interiors.

Beltz said he wants Chrysler to focus on its status as an innovator — the inventor of the minivan and stylish products like the Chrysler 300 sedan. And he's confident Cerberus has the team in place to do that.

"I'm betting my future on it," he said.