Sale of Chrysler Leaves Fate of Current Capital Plans Uncertain

---

Researched by Industrial Info Resources (Sugar Land, Texas). Earlier this week, DaimlerChrysler AG (NYSE:DCX) (Stuttgart, Germany) sold an 80.1% stake in its money losing Chrysler unit to Cerberus Capital Management LP (New York, New York), a private equity firm. The future Daimler AG will retain 19.1% of its Chrysler shares. The $7.45 billion deal is a far cry from the $36 billion Daimler AG paid for the Chrysler unit in 1998 and ends a 9 year attempt to compete head on with General Motors Corporation (NYSE:GM) (Detroit, Michigan) and Ford Motor Company (NYSE:F) (Dearborn, Michigan).

Click on the image at right to view a Chrysler Project Sending Analysis chart.

Now that the sale has been approved by DaimlerChrysler’s supervisory board, the equivalent to a board of directors, several key issues are still in doubt. The first and foremost being how Cerberus will deal with $18 billion in health care and pension liabilities it will take over as part of the deal. In addition, Cerberus will begin negotiations this summer with the United Auto Workers (UAW) union on a new four year deal, which could be tense as Cerberus begins to examine ways to cut the fat within Chrysler.

One other potential problem area will be Chrysler’s capital plans. Currently, Industrial Info is tracking 20 active projects within Chrysler’s operational and planned plants across North America. Of these projects, eight are routine maintenance that must be done annually for plants to stay operational, one is the closure of a plant but the remaining eleven projects fall under the heading of capital work and represent almost $3.3 billion in proposed spending. These projects range in scope from grassroot engine and axle plants to major retools of assembly plants to smaller expansion and upgrade projects.

Cerberus has already stated it will invest $5 billion in Chrysler but has not given any specifics as to what type of investment. The primary concern of the unions is, of course, retaining jobs, and a portion of this investment may well be put in that direction; however, with the foreign automakers spending money left and right across North America to build new facilities and to expand/upgrade the facilities it already has in operation, a large portion of that $5 billion will probably have to be invested in expanding and modifying existing Chrysler facilities. At this point it is really too early to tell what will be spent where within the Chrysler infrastructure.

Cerberus must have at least a general idea of how and where it intends to spend the cash but those plans will probably be kept quiet at least until negotiations with the UAW are completed this summer. Last year Chrysler posted an operating loss of $1.5 billion and committed to trimming 13,000 jobs across its network of plants and you can be sure the unions will try and cut back the number of layoffs as much as possible during the summer’s negotiations.

This still leaves the company’s capital plans up in the air. It is reasonable to assume that its existing capital plans, while not exactly cancelled, are at least being placed on hold for a few months until this sale and this summer’s negotiations are completed. However, until there is some kind of official announcement from Cerberus, Chrysler’s project management group is keeping its collective mouths shut as to what will happen to the outstanding projects. We will have to see how the summer shakes out to determine if this current crop of plans are scrapped, if they are modified or if they are added too as Cerberus takes control of all aspects of Chrysler’s operations.

Can Cerberus turn Chrysler around? That is the billion dollar question. However, Cerberus has been investing heavily in the automotive industry within recent years. Currently Cerberus owns the majority stake in GMAC (General Motors Acceptance Corporation), GM’s financial wing, the rental car companies National and Alamo, and GDX Automotive Incorporated, a manufacturer and supplier of vehicle seating and parts. In addition, Cerberus has reportedly been in negotiations to take over Tower Automotive, another car parts manufacturer as well and recently negotiations to take over Delphi Corporation fell through.

Industrial Info Resources (IIR) provides marketing communication services ranging from industrial database solutions to market forecasting, custom analytics, and specialty promotions that support high-level image campaigns.