Chrysler Group to be sold for $7.4 billion

updated 4:37 p.m. ET May 14, 2007

FRANKFURT, Germany - German-based DaimlerChrysler said Monday it will sell almost all of money-losing Chrysler to a private equity firm for $7.4 billion, backing out of a troubled 1998 takeover aimed at creating a global automotive powerhouse.

Eighty percent of Chrysler Group, burdened by high pension and health costs and declining market share in the United States, will be sold to Cerberus Capital Management LP. Cerberus is taking a huge risk by agreeing to take on billions of dollars in pension and retiree health care costs at Chrysler.

Cerberus Chairman John Snow, a former U.S. treasury secretary, told a news conference in Germany that the New York-based private equity firm believes in Chrysler and wants to see the company recover.

“We think at this particular point in Chrysler’s history, there may be opportunities in the private world, the world of private investment, that create more room for growth and expansion, that allow management to focus with greater intensity on the day-to-day business of producing better cars,” Snow said.

DaimlerChrysler AG said it will sell 80.1 percent of the money-losing Chrysler to Cerberus. It was a stunning reversal of the $36 billion takeover by Daimler-Benz AG in 1998 that was meant to be a blissful marriage of Germany's Mercedes and the American Jeep and Dodge brands.

Cerberus has steadily been building strength in the automobile business. It led a consortium that bought a majority stake last year in General Motors Acceptance Corp., the financial arm of GM, and plans to invest in ailing auto parts giant Delphi.

The prospect of a sale to a private equity firm had worried unions in the United States and Canada because of the firms’ tendency to slash costs and jobs.

More on the Chrysler deal Can a Cerberus deal help out Chrysler? Chrysler Group to be sold for $7.4 billion Deal could be risky for buyout firm Some workers wary of Cerberus deal   Video: Can what's broken be fixed?   Video: Why Cerberus wants to do deal   Video: Automaker now to go private   Video: Private equity to the rescue   Discuss: A good move for both parties?

Daimler will retain 19.9 percent of Chrysler and continue to work with it on drive systems, purchasing, sales and financial services outside North America. But it was clear that DaimlerChrysler and its chief executive Dieter Zetsche, who tried to prop up sales in the U.S. with his “Dr. Z” television commercials, had lost confidence that a combined Chrysler and Daimler could be a worldwide automotive leader.

“We determined that DaimlerChrysler, as currently structured, would not provide the best” framework, Zetsche told reporters in Stuttgart, adding that “at the same time, given my experience with and commitment to Chrysler, this was a difficult task for me personally.”

Shareholders reacted positively. DaimlerChrysler’s U.S. shares rose about 4 percent in morning trading.

DaimlerChrysler said the deal is likely to be completed by the third quarter and would reduce its overall profit by as much as $5.4 billion for 2007.

Snow said that under Chrysler’s leadership, the company’s quality and productivity have risen and that the company has new products that will be well-received in the marketplace.

“We’re going to support those initiatives and we’re going to support your plans,” he said.

Shareholders must approve changing the German company’s name to Daimler AG. A vote will likely be scheduled this fall, the company said.

Private equity firms typically use money provided by pension funds and hedge funds and wealthy private investors to acquire public companies or parts of companies and take them private, often to reorganize and later sell at a profit.

But Snow said Cerberus would focus on longer-term earnings.

“We don’t think about the next quarter. We don’t think about what analysts have to say about us. We care very much about producing long-term results for investors,” he said.

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