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May 14, 2007
Chrysler on Verge of Sale to a Private Firm

FRANKFURT, May 13 — DaimlerChrysler appears close to selling the struggling Chrysler Group to a private equity firm that specializes in restructuring troubled companies, unwinding a 1998 merger that was meant to create a trans-Atlantic automotive powerhouse, people with direct knowledge of the discussions said on Sunday.

An announcement could come as soon as Monday, though last minute details could delay a final agreement between the investment firm, Cerberus Capital Management, and Chrysler’s parent, DaimlerChrysler, these people said. They insisted on not being named because the talks were confidential.

The prospect of private ownership alarms Chrysler’s labor unions, which have come out strongly against the sale of the company, fearful that an investor might try to break up the company or seek deep cuts in wages and benefits.

A sale of Chrysler to Cerberus “will shake the ground under people’s feet in a huge way,” said Kevin Boyle, a professor at Ohio State University who has written extensively about Detroit as the auto capital.

Under the terms of the deal being discussed, DaimlerChrysler would keep about a 20 percent stake in Chrysler and would be freed from nearly $20 billion in pension and health care liabilities for Chrysler’s current and retired workers. The liability would be transferred to a new company controlled by Cerberus.

The sale price was not clear, though executives said the primary value of the deal was in the assumption of Chrysler’s costs. As a result, little or no money may change hands in the deal.

If the sale takes place, it would take apart a deal intended to create a blueprint for the global automotive industry that sank under the difficulty of putting a mass market brand, Chrysler, together with Mercedes-Benz, a luxury company, while keeping both prosperous.

It would also be a watershed for private equity companies, which have become audacious bidders for companies as varied as retailers, steel companies and airlines in the last few years.

But never before has one of them purchased a company as iconic as Chrysler, whose Dodge and Jeep brands are so embedded in the American culture that the company’s near-bankruptcy led to a federal bailout in 1979 that made Lee A. Iacocca, then its chief executive, a household name.

With General Motors, Ford Motor and Chrysler all fighting big foreign competitors like Toyota, “in some ways, the American automobile industry is almost unrecognizable from what it was 25 or 30 years ago,” Professor Boyle said.

Among the issues still to be settled is the amount of investment capital Cerberus will inject into the new Chrysler to finance its operations, according to one executive.

“It is not yet a done deal, but it is heading the right way,” a person involved in the talks said on Sunday night. Another official with knowledge of the talks said no agreement had been signed.

Daimler-Benz of Germany was an eager bidder for Chrysler nine years ago, attracted by its highly profitable lineup of Jeeps and minivans. It paid $36 billion for Chrysler in what was originally portrayed as a merger of equals but ended up being a German takeover.

The merger has never resulted in the savings or market power that its creators envisioned, however. Chrysler’s fortunes have been on a constant roller-coaster ride, with profitable years followed by years of losses, including a $1.5 billion loss in 2006, when Chrysler fell to fourth place in the American market behind Toyota. (It had a 12.6 percent share of the domestic market in 2006, from a peak of 16 percent in 1999.)

Meanwhile, Daimler’s parallel expansion into Asia ran aground because of troubles at its Japanese partner, Mitsubishi Motors. It thought Mitsubishi might serve as the third leg of its global stool when it purchased a stake in 1999. But Mitsubishi’s legal and financial troubles forced Daimler to take management control in 2002, and Daimler ended that alliance in 2004.

In February, DaimlerChrysler announced that it was keeping all of its options open for Chrysler, including a sale or finding a partner to run the company. At the same time, DaimlerChrysler announced a restructuring plan for Chrysler, the second such plan in the last seven years.

Under the latest turnaround, which calls for the company to cut 16 percent of its work force, or 13,000 jobs, Chrysler is not expected to be profitable again until 2009. DaimlerChrysler, whose board is meeting early this week, is scheduled to announce its first-quarter earnings on Tuesday.

Cerberus emerged as the leading bidder for Chrysler late last week, people involved in the transaction said.

Along with Cerberus, other interested bidders in Chrysler included Blackstone, which was exploring a purchase in conjunction with Centerbridge Partners.

Magna International, the Canadian auto parts company, and the Tracinda Corporation, the holding company owned by the billionaire Kirk Kerkorian, also said they had made bids for Chrysler.

Officials at those companies said on Sunday night that they had not been notified that Cerberus was the winner.

Over the last few days, officials at Cerberus and DaimlerChrysler have been involved in detailed discussions, which have been shepherded by JPMorgan, DaimlerChrysler’s investment adviser.

Participants in the talks said on Sunday night that union leaders had been informed of the discussions with Cerberus.

But Chrysler’s unions, including the United Automobile Workers and the Canadian Automobile Workers, have said they would prefer that Chrysler not be sold. The U.A.W.’s president, Ron Gettelfinger, has a seat on the supervisory board at DaimlerChrysler, which would have to approve any deal.

A deal with Cerberus “puts an enormous amount of pressure on the union,” said David E. Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich.

The union thought private equity “would be the end of the world, and in some ways it probably would be,” Mr. Cole said. “The union is in a horrifying box right now. There’s got to be some real hardball that’s a part of this to get the rank and file to go along with it.”

Cerberus, whose automotive investment operations are headed by David W. Thursfield, a former executive with the Ford Motor Company, will probably keep Chrysler’s management in place, at least for now, people with knowledge of the discussions said.

Chrysler’s former president, Wolfgang Bernhard, who advised Cerberus, may receive a seat on the board of the new Chrysler or play some other role.

Mr. Bernhard has visited Chrysler several times in the last few weeks, and has remained friendly with DaimlerChrysler’s chief executive, Dieter Zetsche, who held that job at Chrysler when Mr. Bernhard was president during the early 2000s.

A sale to Cerberus would mark the company’s latest investment in an automotive-related company. Last year, Cerberus, which owns the car-rental companies National and Alamo, led a consortium that purchased a 51 percent stake in the General Motors Acceptance Corporation, the financing arm of General Motors.

Cerberus also reached a tentative agreement to purchase a controlling interest in the Delphi Corporation, an auto parts supplier that used to be owned by G.M. and is operating in bankruptcy. But that transaction stalled, after Delphi and G.M. were unable to agree on contract terms with the U.A.W.

As private equity firms have appeared more often in the headlines, they have also attracted scrutiny. Along with the unions, government officials have expressed increasing concern over the financial restructurings that are the lifeblood of buyout firms; their overhauls of companies have often included massive cuts in jobs or benefits. In countries like Germany and France, private equity firms have been derided as locusts that strip companies of their assets.

Last month the Service Employees International Union, a politically active organization that represents nearly two million workers, released a report expressing public policy concerns about private equity. Among those were questions about the lack of disclosure and about certain tax breaks for buyout firms.

Nonetheless, DaimlerChrysler’s shares have climbed 15 percent, to $82 on Friday, since mid-February, when private equity firms entered the bidding for Chrysler. At the company’s raucous annual meeting in Berlin last month, a succession of shareholders stood up to demand that the company move swiftly to dispose of Chrysler.

“This marriage made in heaven turned out to be a complete failure,” said Hans-Richard Schmitz, who represented the German Association for the Protection of Shareholders. “What’s missing now is a swift resolution of the issue by the management of the group.”

This week, the shareholders may get their wish.

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