Daimler Gets Little Back for Chrysler

Of the total price of 5.5 billion euros ($7.4 billion), most flows back into the very Chrysler operations that Daimler is largely shedding after ni...
Roy HarrisMay 14, 2007

Germany’s DaimlerChrysler AG has finally ended — for 5.5 billion euros ($7.4 billion) — its nine-year misadventure with owning Chrysler. But in selling all but 19.9 percent of Chrysler Holding LLC to the Cerberus Capital Management LP private-equity operation, Daimler gets precious little of the overall price being paid.

Under the deal’s terms, 3.7 billion euros of the price from Cerberus is flowing into Chrysler Corp. itself, with 800 million euros going into Chrysler Financial Services LLC. Both units, as part of Chrysler Holding, will be 80.1-percent owned by Cerberus. DaimlerChrysler receives the balance of 1 billion euros, but will grant Chrysler Corp. a loan of 300 million euros.

Further, Chrysler Group is being transfered to its new owners debt-free. Since Chrysler Group anticipates negative cash flow until the deal’s closing, expected in the third quarter, a cash outflow of 1.2 billion euros will result for Daimler AG, as Daimler Chrysler will be renamed, pending approval by shareholders. After all the terms are in place that will create a net cash outflow from Daimler of 500 million euros.

Daimler also will be discharging long-term liabilities of the Chrysler Group, including prepayment compensation of about 650 million euros and the usual transaction costs. Chrysler Group’s financial obligations for pension and healthcare benefits for employees and employees of the financial services business — managed by pension plans that are significantly over-funded — will be retained by the Chrysler companies.

Taken together, Daimler estimates, net profit under international financial reporting standards (IFRS) will be reduced by 3 billion euros to 4 billion euros for 2007. The deconsolidation of the Chrysler companies and the reduction in the balance-sheet total for them will lead to an increase in the equity ratio of Daimler’s industrial business to more than 40 percent by the beginning of 2008.

DaimlerChrysler AG was advised during the transaction by Shearman & Sterling as lead counsel.

DaimlerChrysler, a New York Stock Exchange-listed company, was required this year by the Europen Union to report financial results using IFRS, rather than U.S. generally accepted accounting principles (GAAP). The change resulted in an increase in reported revenues, net income, and earnings per share, although group operating profit was reduced. The loss suffered by the Chrysler division was also reduced by the switch, and was listed as $682 million rather than $1.5 billion. It was the only DaimlerChrysler unit to show a loss.

There will be no changes relating to the bonds issued and guaranteed by DaimlerChrysler, the company said. In the financial services business for the Chrysler, Jeep and Dodge brands, Cerberus will take over the financing previously provided by DaimlerChrysler.

The original purchase of Chrysler by the former Daimler-Benz AG, in 1998, was for $36 billion.

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