Global Insight Perspective | |
Significance | Media reports have stated that Chrysler CEO Robert Nardelli spoke with dealers on Tuesday (23 September), informing them that Chrysler has lost US$400 million so far this year, along with seeing sales drop by 24%. |
Implications | Just as the financials have come to light, Chrysler parent Cerberus Capital Management has reportedly approached Chrysler co-owner Daimler to acquire the remaining 19.9% of the company that it does not currently own. |
Outlook | Motivation for the purchase of the rest of Chrysler is pure speculation at this point, but may range from the time and price simply being right to being a prelude to a sale of Chrysler to a third party some time in the future. |
Chrysler has reportedly told its dealer body in meetings on Tuesday (23 September) that it has lost US$400 million so far this year, according to the Wall Street Journal (WSJ). The privately held company is not required to publish its financial results, thus making it difficult to know exactly what the company's financial condition is. CEO Bob Nardelli is reported to have told dealers that despite cutting costs dramatically, the company is still losing money. Sales have fallen 24% through August, according to the company, and it has US$11 billion in cash on hand. A Chrysler spokesperson reportedly declined to comment on the story, stating that the meeting and any financial results discussed were confidential. The spokesperson reportedly repeated the company line that Chrysler is meeting or exceeding financial targets, but did admit that the company is operating at a loss. Chrysler lost a reported US$1.6 billion in 2007.
Word came down yesterday that Chrysler's owner, private equity firm Cerberus Capital Management, has approached German automaker Daimler about potentially selling the remaining 19.9% of Chrysler that Cerberus does not own. The sale of Chrysler to Cerberus in 2007 saw only 80.1% of the company transfer ownership to the private equity firm for US$7.4 billion; Daimler kept a part of the company for itself. Daimler has reportedly confirmed that the two parties are in negotiations to sell the rest of the company, but no specifics on the deal have yet been made public. "Daimler confirms that the company is in discussions with Cerberus Capital Management regarding the redemption of its remaining 19.9%," according to a statement released by the German automaker.
Outlook and Implications
There are several reasons why Cerberus might want to complete its ownership stake in the company now, despite the fact that Cerberus itself has been hammered by its investments over the past two years. The company is the majority shareholder for GMAC finance company, which has been devastated by the collapse of the residential mortgage market and the subsequent spike in car loan defaults that has resulted from that fiasco. Cerberus' investment in Chrysler has been equally devastating, as shortly after the purchase, the bottom fell out of the truck market in the United States, sending Chrysler sales into a tailspin and dramatically affecting its revenue. Motivation as to why Cerberus would be interested in trying to spend more money to acquire Cerberus could be simply that the time was right to do so—Daimler may be tired of accepting losses on its 19.9% ownership share, such as the US$550 million loss it booked for the first quarter of 2008, when it has its own restructuring and product investment to look after. The company has said that it intends to continue with its industrial partnership with Chrysler, which would make sense, as several Chrysler-owned component plants (such as the upcoming new axle plant in Marysville, Michigan, that has been jointly acquired by ZF Friedrichshafen) will be making components that could see use on the next-generation Mercedes-Benz M-Class sport utility vehicle (SUV). It may be that Daimler did not see the need to continue its ownership stake in order to continue its industrial relationship.
Or, as some have suggested, this may be a prelude to an ultimate sale of Chrysler by Cerberus to an as-yet-undetermined third party. By acquiring 100% of the automaker, Cerberus will eliminate the need to involve Daimler in any potential sale to another party, potentially speeding and simplifying that transaction. Cerberus has repeatedly stated that it is not interested in selling Chrysler, and its history of holding onto companies longer than the typical private equity turnaround fund does tend to speak favourably of its commitment to its purchases. However, with at least two more years of falling sales volumes to look forward to until new vehicles start arriving in Chrysler showrooms to try and save Chrysler's rapidly sinking ship, and economic conditions not looking favourable for Cerberus' other investments as well, a sale of the company sometime in 2009 to another party may be what Cerberus needs to do in order to try and recoup some of its hefty investment.