For DaimlerChrysler, there's more to a deal than cash
May 7, 2007
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Kirk Kerkorian has offered to buy the Chrysler Group for $4.5 billion. He also tried to buy the company in the 1990s.
The price for the Chrysler Group might not matter as much to DaimlerChrysler AG officials as shedding the division's huge pension and health care liabilities does.
If the German company can get a deal where those liabilities -- which have been estimated to be in the $16.5-billion to $19-billion range -- are eliminated from its balance sheet, it might accept a sale price that on its own would seem low, the Free Press has learned.
"It would be bad if you sold your house and you keep your mortgage," a person familiar with the thinking said on the condition of anonymity because of ongoing negotiations. The sale price is "totally irrelevant. Whether you get $1 billion or $20 billion, it depends upon what you keep and what liabilities you have to look after."The only publicly confirmed offer to buy the struggling Auburn Hills-automaker is for $4.5 billion from Kirk Kerkorian. The investor tried to buy Chrysler during the 1990s, and it seems this offer won't be considered because of his contentious past with DaimlerChrysler.
Analysts agree, however, that the offer provides a framework for the bidding.
An analyst with KeyBanc Capital Markets has said Magna International and Onex Corp. are teaming up to offer about $5 billion.
Private equity firms Blackstone Group and Cerberus Capital Management also are believed to be interested but their offers are not known. Analysts had speculated the firms valued the company in the $5-billion to $6-billion range. Some in the German media speculate a price as high as $9 billion.
It cost $36 billion to unite Daimler-Benz AG and Chrysler Corp. nine years ago.
But the possibility of wiping out nearly $20 billion in liabilities could make even a low price look good -- or at least acceptable -- to DaimlerChrysler's predominantly European shareholders. But on the flip side, without those liabilities changing hands, the prices currently being talked about publicly might be wholly inadequate.
"The sales price is no big deal," said David Cole, chairman of the Center for Automotive Research. The liabilities are "the key factor. I am not sure how they are going to do that."
Longtime auto industry analyst Joe Phillippi of AutoTrends Consulting agreed. "For them, the most important thing is, obviously, losing that pension and health care liabilities for current and retired employees," he said.
Peter Morici, a business professor at the University of Maryland, is skeptical that Daimler officials will be able to find a buyer.
"It's going to be hard to find a fool to take them, and only a fool will take the company if it has to take the liabilities because it just doesn't make sense. The math just doesn't work," Morici said.
Indeed, any deal would be difficult, experts say.
Kerkorian's offer is believed to show how a deal is likely to be structured.
He proposed that the United Auto Workers union be given an ownership stake in Chrysler in exchange for concessions on health care, which could dramatically reduce the size of the liabilities. The bid also includes a provision that would require DaimlerChrysler to be responsible for an unspecified amount of the pension and health care liabilities.
Even before Kerkorian's offer, General Motors Corp. talked with DaimlerChrysler in January about a deal in which GM would take the Chrysler Group off Daimler's hands.
Daimler would help pay for future Chrysler health care costs and GM would give Daimler a stake in its company of less than 10%. The idea died, however, because DaimlerChrysler officials believed they could get a better deal in the marketplace, the Free Press reported in March.
Gerald Meyers, a University of Michigan business professor and former chairman of American Motors Corp., said that any proposed deal likely would involve swapping equity with the unions in exchange for some of the promised future benefits.
"I think the UAW is going to get something in any of the deals. I think that is the only way the UAW can be brought around," he said. "The UAW is not going to go along with concessions without a piece of the action."
UAW President Ron Gettelfinger has repeatedly said he wants to keep DaimlerChrysler from splitting up, often noting that the company as a whole did well last year -- reporting 3.8 billion euros ($5 billion) in net profit.
The Chrysler Group lost $1.5 billion in 2006, a number that was revised to $680 million recently because of changes in accounting procedures.
Investment banking firm Goldman Sachs has estimated the unfunded pension and health care liabilities at $16.5 billion. KeyBanc Capital Markets' Brett Hoselton has told clients that Chrysler's unfunded pension and other liabilities are worth $19.2 billion.
Hoselton said the ultimate outcome is uncertain.
"Scenarios include retainment by Chrysler or placement into a separate entity" independent from Chrysler or DaimlerChrysler, he said. "We believe both scenarios include DaimlerChrysler retaining some responsibility for the liabilities."
Meanwhile DaimlerChrysler officials offered no insight. Hartmut Schick, the company's top public relations executive in Germany, reiterated the company's position that "all options are open."
The second round of bids was due this past week and DaimlerChrysler is expected to decide soon which one or two groups to continue more negotiations with, people familiar with the process have said.
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