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Cerberus bullish about Chrysler
Automaker a 'diamond in the rough' to buyer

By Rick Popely, Tribune staff reporter. Tribune staff reporter Becky Yerak contributed to this report

Published May 20, 2007

A company that is losing money and market share, carries enormous pension and health-care burdens and faces difficult union negotiations is just another fixer-upper for private-equity firm Cerberus Capital Management LP.

Why else would it have agreed to pay $7.4 billion for an 80 percent stake in Chrysler, the smallest of the three U.S.-based automakers and the unwanted stepchild of Germany-based DaimlerChrysler AG, parent to Mercedes-Benz luxury cars?

To Cerberus Chairman John Snow, struggling Chrysler is a diamond in the rough.

"We think it's poised to do a lot better. The quality of their products has improved. Their productivity has improved. It's a great brand name, and they have an array of rich products," Snow said in a telephone interview after the deal was struck last week.

"We're confident that in a private-equity setting long-term we're going to see Chrysler move to a higher level of performance."

"Long term" is typically five to seven years to a private-equity firm such as Cerberus, which then tends to sell all or pieces of a leaner, more profitable company or take it public again.

But Snow said there is no such schedule for Chrysler.

"We never buy a company with an exit strategy in mind," he said.

That statement surprises some observers, who expect to see Chrysler on the market again, be it through a sale or an initial public offering.

"I doubt if they can think of it as a corporate acquisition," a Chicago-area private-equity executive said. "You certainly can't bank on another automotive company buying it, so they've got to think of it as a public company."

Gerald Meyers, retired chairman of American Motors Corp., sees potential future interest from a Chinese or other foreign manufacturer to gain instant access to the U.S.

"They'll clean it up, cut costs and sell it to somebody," he said, dismissing any notion that Cerberus intends to hang on to Chrysler longer than the four to five years he suspects it will take to turn a profit.

That would fit Cerberus' pattern for buying distressed companies. For example, it bought Vanguard Car Rental Group, which owns the National and Alamo brands, out of bankruptcy for $290 million in 2003. Last year it sold the European operations and recently canceled plans for an IPO, announcing it would sell the company to privately held Enterprise Rent-a-Car. Terms were not disclosed.

Though not in bankruptcy, Chrysler is not healthy. It lost nearly $1.5 billion last year (reduced to $680 million by accounting adjustments) and $2 billion in the first quarter. Its U.S. market share is up nearly a point this year, to 13.8 percent, but it was 16 percent in 1998, when Daimler-Benz came calling.

That would seem to scare off buyers, but Harry Kraemer, executive partner with Chicago-based private-equity firm Madison Dearborn Partners, said: "It all comes down to what the value of the company is compared to what you pay for it. If you could buy it for significantly less than it's worth, why wouldn't you?"

Indeed, Cerberus' deal for Chrysler comes with no debt in its automotive operations and includes a profitable financial-services unit and globally recognized brands, including Jeep and Chrysler.

That makes Chrysler look like a bargain to Tulane University finance professor Peter Ricchiuti.

"In today's dollars, $7.4 billion is not a lot of money," Ricchiuti said, noting that buyout firm Kohlberg Kravis Roberts & Co. is acquiring Texas utility owner TXU Corp. in a transaction valued at $48 billion. Canadian newspapers have reported that Cerberus is considering an offer for Canadian phone company BCE that could hit $32 billion.

Besides, Ricchiuti said, the real lure for Cerberus is Chrysler Financial because it offers synergies with GMAC, the former General Motors finance unit. Cerberus acquired a majority interest in GMAC last year and is likely to combine back-office operations with those of the Chrysler unit.

Since the deal was announced Monday, Cerberus has maintained that Chrysler's current management, led by Chief Executive Tom LaSorda, will continue to run the company. Snow said Cerberus' staff of more than 100 executives who manage its $24 billion portfolio would be available as support, but "it's the management team at Chrysler that will turn Chrysler around."

The Cerberus automotive team is run by David Thursfield, former head of Ford Motor Co.'s international operations. Other key figures are retired Ford sales executive Robert Rewey, former Chrysler sales executive Gary Dilts and Wolfgang Bernhard, who was Chrysler's chief operating officer for five years.

Cerberus says that Bernhard, hired as an adviser during the bidding for Chrysler, will not have a management role. Meyers is skeptical.

"Those four guys will be constantly looking over LaSorda's shoulder. LaSorda may be singing a happy song now about how great it is to be private, but he'll be on a very short leash. If he makes one mistake, he'll be out, and [Bernhard] will be in," he said, calling Bernhard "a living threat to LaSorda."

When the deal closes in the third quarter and Chrysler goes private, it will no longer have to report financial or sales results, but Meyers said LaSorda's tenure will be an indicator.

"When you see the Cerberus management going into Chrysler, you know it's not working," he said.

One of the first tests for Cerberus will be negotiations this summer with the United Auto Workers. Chrysler will press for the same breaks on health-care costs the union has given General Motors and Ford, and further concessions.

"Without Daimler behind them, Chrysler will be able to plead more poverty at the bargaining table," Ricchiuti said, predicting the UAW will acquiesce.

Cerberus says it doesn't plan additional cuts, beyond those announced in February -- one plant closing, shifts at two others slashed and 13,000 jobs cut in North America. Chrysler has the highest incentives in the industry, nearly $4,000 per vehicle, and Meyers said, "Cerberus isn't going to stand for that."

He also sees Cerberus unloading Chrysler's $29 billion pension and $17.5 billion health-care liabilities into a trust fund or another alternative to relieve itself of those burdens.

Without being specific, Snow said Cerberus' ownership will yield more than shrewd financial management.

"When people think of private equity, they think of financial engineering, being good at clever and sophisticated financial structures," he said, but Cerberus will focus on "real results, hard-core free cash flow and better operating results and net profit."

And that brings Cerberus to a basic need of any automotive turnaround: trend-setting products like Chrysler's 1984 mini-vans or the current 300 sedan.

"They've got to come up with breakthrough products," Meyers said. "I don't like the Hummer -- I think it's a ridiculous vehicle -- but it's a breakthrough product that has caught the public's attention. Hybrid cars are the same thing."

But developing models typically takes three to four years, and Meyers doesn't expect Cerberus to be around long enough.

"If they can't make it happen in four or five years, they'll be sadly disappointed," he said, and then gone. ---------- [email protected]

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