Can a Cerberus deal help out Chrysler?

Roland Jones • Profile • E-mail

Monday's announcement that a private equity firm will pay $7.4 billion for a majority stake in DaimlerChrysler’s struggling Chrysler unit brings to an end a period of uncertainty for Detroit’s No. 3 automaker. But will the new owner, Cerberus Capital Management LP, be able to put the troubled automaker on the road to success?

The answer may hinge on the ability of Cerberus to manage Chrysler's union contracts.

Chrysler and the other Big Three automakers will begin negotiations with the powerful United Auto Workers union this summer to redraw their labor contracts. Chrysler’s relationship with its unions is at the heart of the deal with Cerberus, and a successful renegotiation of that relationship is key to the long-term survival of the automaker, analysts say.

Chrysler is saddled with $18 billion in retirement and health care costs for current and retired employees guaranteed by existing union contracts. Cerberus is taking on those obligations in its risky takeover deal.

General Motors, Ford and Chrysler all have struggled with these costs, which they argue leaves them at a disadvantage to Asian and European competitors who don’t face the same costs. Some argue that deeper union concessions are the only way the U.S. manufacturers can remain competitive.

“The albatross around their necks is their cost structure, and dealing with the unions,” said Scott Kays, president of Kay’s Financial. In order for American car companies to be more competitive with foreign automakers, he said, they need to reduce the $1,600 in costs for healthcare and pensions that comes out of every car they make, compared with $300 per car for Japanese rival Toyota.

“Unless concessions are made, they will have hard time competing,” Kays told CNBC Monday.

Last year, Ford and GM won concessions from the UAW, making union workers pay a share of their health insurance premiums, but Chrysler was not included in the deal. Under Cerberus management Chrysler is likely to push for parity with GM and Ford, said George Magliano, director of automotive industry research for the Americas at Global Insight.

“Cerberus can’t ask for more concessions than GM and Ford, and the union can’t say Chrysler can’t have the same as GM and Ford, and so my feeling is by the end of this negotiation period all three U.S. automakers will have similar deals in place, and they will have cost structures closer to their Asian rivals,” said Magliano. “In the end, both the unions and Detroit are fighting for survival.”

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?

In the months leading up to Monday's announcement, union leaders had expressed concern about a sale of Chrysler to a private firm. In general, such firms often take failing companies and aggressively reorganize them, slashing costs and jobs in an effort to sell the companies  later for a profit.

Earlier this year UAW President Ron Gettelfinger warned that a private equity buyer would “strip and flip” the company by selling it off in pieces.

But Gettelfinger said Monday that after it was clear DaimlerChrysler was determined to sell the U.S. unit, he decided to embrace the Cerberus purchase. He will reportedly meet with Cerberus management on Tuesday.

“The decision has been made, we’re supportive of it,” Gettelfinger said on WJR-AM in Detroit. “We’re going to close that past chapter. We’re going to move forward.”

In reaching the deal for Chrysler, Cerberus apparently beat out billionaire investor Kirk Kerkorian and Canadian auto-parts supplier Magna International, both of whom were cited as interested suitors.

Analysts say Cerberus, which already has major interests in the auto industry, is well-positioned to tackle Chrysler's problems.

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