Human Capital & Careers

Daimler on Hook if Chrysler Pensions Close

Daimler promises to pay $1 billion if Chrysler's overfunded pension plans end within five years.
Stephen Taub and Roy HarrisMay 18, 2007

In yet another sign of how hard it has been for DaimlerChrysler AG to extricate itself from its ill-fated ownership of Chrysler, the German carmaker has promised to pay $1 billion into the Chrysler pension plans if the plans terminate within five years, according to the Pension Benefit Guaranty Corp.

Chrysler was purchased in 1998 for $36 billion by Daimler-Benz AG. Earlier this week, Daimler sold all but 19.9 percent of its stake in Chrysler to Cerberus Capital Management LP for 5.5 billion Euros ($7.4 billion). Under the deal, Cerberus agreed to invest $5 billion in Chrysler over the next five years and take responsibility for Chrysler’s $18 billion liability for its workers’ health care benefits and pension obligations, according to the Associated Press.

Nonetheless, “Both Daimler and Cerberus have made significant financial commitments to strengthen Chrysler pensions,” said Vince Snowbarger, interim director of the PBGC, in a statement. Chrysler, now funded by Cerberus, will make $200 million in pension contributions over the next five years above and beyond the legally required minimum, the PBGC said.

Leaders of the United Auto Workers, who lent their support to the deal, have said Chrysler’s pension plan is overfunded by $2 billion and that its benefits are secure.

Still, the latest news that Daimler would be on the hook should the pension plan close in the next five years is one more indicator of how hard it was for Daimler to shake free of Chrysler’s heavy burden. Under the terms of the acquisition, 3.7 billion euros of the $5.5 billion 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 DaimlerChrysler 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.