Chrysler: As the Rumor Mill Churns

Chrysler: As the Rumor Mill Churns

By Michelle Krebs February 26, 2007

GM? India? Magna? Private equity?

Analysis, speculation and flat-out rumors continue as DaimlerChrysler “explores all options” regarding the future of its Chrysler Group. A potential Chrysler-General Motors link has generated the most interest.

The Financial Times in London reported on Sunday that DaimlerChrysler is considering taking a minority stake in GM as payment for Chrysler if a deal between the two carmakers goes ahead.

Buying part or all of Chrysler’s industrial assets for shares placed with DaimlerChrysler would relieve GM of the need to raise new cash, which GM would find onerous given the current “junk” status of its debt, the paper noted. As a minority shareholder of GM, DaimlerChrysler could benefit from billions of dollars’ worth of synergies and cost savings expected from merging the two companies.

The London newspaper quoted a source identified as a leading shareholder as saying: “They are interested in who takes Chrysler over, and they would be happy to take equity in GM in return.” The paper said such an equity arrangement has the support of at least two of DaimlerChrysler’s institutional shareholders.

Such a plan may be sheer wishful thinking on the part of the quoted shareholder and other European shareholders eager to dump Chrysler. But it represents a shift in GM strategy, which has been moving away from equity arrangements.

Chrysler and GM apparently explored a possible link as early as last summer, but ultimately GM walked away from such a plan. GM saw too little in the deal for itself, as Chrysler demanded more than GM was willing to give. GM concluded the same only a few months later regarding a hookup with Nissan-Renault –- too little to gain for GM with all the advantage going to its partner.

A shift in strategy may become a necessary defensive option for GM, however, depending on who tries to buy Chrysler.

Partsmaker Magna Courting?

Automotive supplier Magna International Inc. reportedly is performing due diligence work on Chrysler and is seriously considering potential purchase of the company, according to Detroit-area publications, citing a report to investors by KeyBanc Capital Securities analyst Brett Hoselton.

DaimlerChrysler CEO Dieter Zetsche reportedly met with Magna CEO Frank Stronach Feb. 14, the same day that Zetsche announced the automaker was exploring options for Chrysler's future. The report says the Canadian supplier, that has for decades had designs on assembling automobiles,  has met with UAW officials. Magna is No. 3 on Automotive News' list of top 100 global suppliers with nearly $23 billion in revenues for 2005. Magna's president is Mark Hogan, a former top executive for GM.

Magna ranks No. 3 on the Automotive News list of the top 100 global suppliers with worldwide original-equipment automotive parts sales of $22.80 billion in 2005.

More Private Equity Firms Interested?

Last week, at least four private equity firms were reported to be in preliminary talks with DaimlerChrysler to buy Chrysler. Those named by the Financial Times were: Apollo Management LP, the Blackstone Group, the Carlyle Group, and Cerberus Capital Management LP.

But are there others?

Long before DaimlerChrysler officially put the “For Sale” sign in Chrysler’s yard on Feb. 14, local sources in the equities market told Edmunds AutoObserver that private equity giant Kohlberg Kravis Roberts & Co. (KKR) is a likely contender.

KKR made Page 1 of The New York Times this weekend as it looks to be part of the biggest leveraged buyout in history. KKR and Texas Pacific Group is near a deal to acquire the Texas utility, TXU Corp., part of KKR’s energy strategy, for $45 billion, the paper cited sources as saying.

That deal would surpass the previous largest leveraged buyout by KKR’s longtime arch rival Blackstone Group, one of the equity firms supposedly interested in Chrysler. Blackstone holds the current record of largest leveraged buyout with the $39-billion acquisition of office landlord Equity Office Properties on Feb. 9. Blackstone already is dismantling its investment and selling it in pieces, a likely scenario if it or any other equity firm buys Chrysler as well.

Chrysler: The World’s Cheapest Car Company

Compared to these deals (and to the $35 billion Daimler paid), Chrysler, estimated at being worth between $7 billion and $17 billion, looks like a mere pittance.

Trade journal Automotive News provides an intriguing breakdown of Chrysler’s assets, based on an analysis by Adam Jonas of Morgan Stanley Research in London. He calls Chrysler “the cheapest car company in the world.”

Jonas told the journal Chrysler’s most attractive assets include flexible assembly plants, a lean work force, the iconic Jeep brand, segment-leading minivans, solid pickups and a strong lineup of rear-drive sedans.

He valuates Chrysler’s assets as follows: Dodge -- $6.6 billion; Jeep -- $5.3 billion; Chrysler brand -- $3.2 billion; global operations, such as Chrysler's stake in Austria’s Magna Steyr -- $1.4 billion; joint ventures, such as Beijing Jeep -- $682 million; real estate, including the company headquarters, technical center and proving grounds -- $1.4 billion; and deferred taxes and overfunded pension assets -- $7.1 billion. Chrysler Financial, not part of the package, would add another $7.6 billion.

Can India Be Ruled Out?

Much speculation has concerned a Chinese automaker purchasing DaimlerChrysler to give it an immediate stronghold in the U.S., from manufacturing facilities to a vast North American dealer network.

But can a company from India be ruled out?

Automakers from India have been chomping at the bit as much and for a lot longer than the Chinese for a foothold in the U.S. Anyone who has attended a National Automobile Dealers Association convention in the past two decades has undoubtedly seen India-built cars parked outside hotels and convention centers trying to get dealers to bite.

Mahindra & Mahindra as well as Tata come immediately to mind.

A column from the San Francisco Chronicle, reprinted in The Week magazine and entitled “America’s blind spot about India,” talks about a major buyout by an Indian company of a European one that got no ink in the U.S., which is more focused on China.

In late January, the Indian conglomerate Tata Group paid $12.2 billion for Corus, the Anglo-Dutch steelmaker. It was the biggest foreign takeover ever by an Indian company, but it “was reported without fanfare and garnered scant comment in the U.S. media.”

The column goes on to say that such lack of attention is par for the course. Quoted in the column is a Goldman Sachs report that says: “America only barely acknowledges India’s high rank among the fast-rising countries outside the West… Large Indian corporations in industries ranging from pharmaceuticals to software have quietly been growing bolder about snapping up companies in the U.S. and Europe.”

Could an automaker like Chrysler be next?

The column notes that America ignores India’s economic ascendancy at its own peril. India offers significant “strategic political incentives,” such as help with keeping Chinese expansionism in check and burgeoning business expertise.

Established in 1945, fast-growing Tata is a conglomerate with an expanding automotive and engineering services business, which has long had offices in Detroit’s suburbs. Tata Motors, which collaborated with DaimlerBenz from 1954 to 1969, added a line of cars to its utility vehicles, has three domestic manufacturing plants and is expanding domestically as well as internationally. It moved into Eastern Europe during 2005, strengthened its presence in Western Europe in 2006 and unveils a new ultra-cheap family car this year.

Also established in 1945 as a utility vehicles manufacturer, Mahindra has grown to one of India’s top 10 industrial firms, with seven plants in India and an expanded product line. Mahindra recently signed a long-term strategic agreement with Renault to build an assembly plant with 500,000 units of capacity a year by the next decade. Mahindra also has a joint venture with Renault to sell the Dacia Logan, Renault’s extremely low-cost car, in India beginning this year. Mahindra has ambitious global aspirations with a presence in five continents, including tractor assembly plants in the U.S.

The Official Word: No Comment

Meantime, GM and Chrysler officially are mum on all the rumors, speculation and analysis.

On Friday, Steve Harris, vice president of GM Global Communications, who headed corporate communications for Chrysler before joining GM, used the automaker’s FastLane blog to explain why GM is not commenting on the “firestorm of stories, studies and speculation by media, analysts and bloggers.” He said GM and other carmakers frequently discuss issues of mutual interest. “In most cases, these discussions don't lead anywhere. So as a matter of policy, the company doesn't confirm or comment publicly on these types of discussions unless and until it's determined that disclosure is appropriate,” Harris wrote.

Similarly, Chrysler CEO Tom LaSorda used his company’s Firehouse blog for a pep talk to his troops. Despite the “frenzy of rumors,” LaSorda asked employees to stay focused on the recovery plan he has laid out, designed to make the company profitable by 2008.

Meantime, JPMorgan Chase is preparing an investment book to be distributed selectively to would-be suitors.

Michelle Krebs:  is Editor-in-Chief of AutoObserver.com. Follow @AutoObserver on Twitter.