Kerkorian Offers $4.5 Billion for Chrysler

Apr 05, 07:30 PM

Current Headlines: BERLIN _ Kirk Kerkorian, the Las Vegas billionaire with a history of shaking up the Detroit auto industry, is on the steps of DaimlerChrysler AG, offering $4.5 billion to take the struggling Auburn Hills, Mich.-based unit off the Germans' hands.

In a letter to DaimlerChrysler Chairman Dieter Zetsche and the company's supervisory board, made public Thursday, Kerkorian's Tracinda Corp. made a cash offer for the Chrysler Group. He also offered to place $100 million in escrow for a 60-day exclusive window to review the company's books before making the deal final. Tracinda said it was willing to forfeit $25 million if the transaction is not consummated.

"Tracinda believes its offer would permit DaimlerChrysler to dispose of Chrysler at an attractive price and enable DaimlerChrysler to focus on its other operations," the letter said. "Tracinda also believes that the experience, expertise and financial strength Tracinda and its team will bring to Chrysler will greatly benefit Chrysler and its employees, suppliers and customers."

News of the Tracinda offer sent DaimlerChrysler stock up 5.3 percent to close Thursday at $84.80, its highest price since 1999.

Kerkorian, 89, has been making waves in the auto industry for two decades. He bought up big chunks of then-Chrysler Corp. in the 1990s in an unsuccessful bid to take over the company.

After the union of Daimler-Benz AG and Chrysler in 1998, Kerkorian also unsuccessfully sued DaimlerChrysler saying the deal pitched as "merger of equals" was a one-sided takeover that cheated him out of a higher stock price.

Just last year, Kerkorian ended a brief but rocky stint as a major shareholder in General Motors Corp. He bought up almost 10 percent of GM stock, encouraged the Detroit automaker to pursue an alliance with Nissan Motor Co. and Renault SA and then dumped his stock after the alliance talks fell through.

"This sounds like an ante in a poker game that Mr. Kerkorian wants to play in," said auto analyst Jim Sanfilippo, executive vice president and chief marketing officer at WPP Team Detroit. "This is a gentleman with a lot of money and a lot of options. ... I think he's got Zetsche's attention."

DaimlerChrysler spokesman Hartmut Schick declined comment. The public offer comes on the heals of the DaimlerChrysler annual meeting in Berlin where numerous shareholders expressed dissatisfaction with the nearly nine-year-old merger between Daimler-Benz and Chrysler.

At the Wednesday shareholders meeting, Zetsche confirmed for the first time that the company is in talks with interested parties about Chrysler's future but declined to give any further information. In February, Zetsche announced that all options are on the table for Chrysler and refused to rule out a sale.

Three other groups _ Canadian auto supplier Magna International Inc., and private equity firms Blackstone Group and Cerberus Capital Management _ are believed to be in the hunt for the Chrysler Group, which lost $1.5 billion last year.

At least two other groups are examining Chrysler to determine whether to make a formal bid, people close to the bidding process told the Detroit Free Press.

A German magazine first reported earlier this week that DaimlerChrysler management board member Rudiger Grube plans to meet with serious buyers next week in New York and that a decision regarding a buyer could come soon afterward.

The Tracinda deal would depend on a new collective bargaining contract with the UAW and for DaimlerChrysler to pick up a share of the unfunded pension and health care expenses for retirees. Goldman Sachs, an investment banking and advisory firm, estimates any company that buys the Chrysler Group would inherit $16.5 billion in pension and health care liabilities.

Tracinda would offer an equity stake in the new Chrysler to workers and executives.

"Tracinda intends to build and strengthen Chrysler as an independent entity by partnering with the United Auto Workers and senior management of Chrysler, and will offer the UAW and Chrysler management the opportunity to participate as equity partners in the transaction," the company said.

Tracinda said its offer is not subject to financing as it believes it can obtain the necessary financing for the offer.

In a separate letter to Zetsche, Jerry York, Chrysler's former chief financial officer and Kerkorian's right-hand man, makes the case in a letter to Zetsche for why Chrysler should be taken private.

"As Tracinda's letter to DaimlerChrysler's Supervisory Board suggests, we have been following Chrysler closely and studying publicly available materials. And having been a major shareholder for over a decade we are very familiar with both Chrysler and the automotive industry, and have come to believe, all factors considered, that a private ownership approach is in the best interests of all Chrysler constituencies," York wrote.

York said Chrysler needs a new owner with patience to do what is needed to turn Chrysler into an independently viable company again, which could take from five to seven years.

In particular, York said Chrysler needs to invest in new products that can better compete against Asian automakers on quality and environmental friendliness.

"The returns will not come quickly. Investors that feel the need to show `mark to market' results in their funds in relatively short time frames (just a few years) will not be willing to invest as necessary over an unusually lengthy period of time to achieve the necessary end results," York wrote. "Long term, patient investing has been Tracinda's approach."

In addition, York notes that a private company can "offer a substantial portion of equity in the company to the UAW as part of finding a solution to ever-rising healthcare costs, which not only are unaffordable by corporations, but over time will likely prove to be unaffordable by governmental entities as well."

Some analysts, including Brian Johnson of Lehman Brothers, believe DaimlerChrysler may look more kindly on the Kerkorian bid because he expresses a willingness to work with the unions to address the company's stiff liability issues.

"We would classify the Kerkorian offer in the category of labor-friendly private equity buyer," since he said he would not consider purchasing it unless a deal with the UAW to reduce compensation was in place, Johnson wrote.

A UAW spokesman declined to comment on the Kerkorian offer Thursday. But Canadian Auto Workers President Buzz Hargrove said labor leaders did not view Kerkorian's offer as labor friendly but in the same vein as any other private-equity offer.

"This is exactly what we've been opposing from the outset," Hargrove said. "We're going to fight like hell to make sure we protect every job we can. ... There's all kinds of potential here to stop a sale. There's not many people who want to walk in and buy an organization like this with a union that's opposed to the deal."

Jim Hall, vice president of industry analysis for AutoPacific in Southfield, Mich., said its in DaimlerChrysler's best interest to find a buyer that will work with the unions and keep friendly ties to the company. DaimlerChrysler will still need to work with Chrysler.

"If it sells, understand, there are things the Chrysler Group is responsible for, for the other part of DaimlerChrysler," Hall said. "Daimler is going to have to negotiate, for example, to have Chrysler continue to provide transmissions for it. Those are things in the past that shut these deals down."

And Hall said Tracinda's bid indicates to him that Kerkorian doesn't have any inside knowledge of what the real offers are. He believes it _ and the other offer estimates floating around publicly _ are far lower than what's actually on the table.

A German newspaper has reported that bids as high as $9 billion have been made already but no one has publicly confirmed that number. Magna reportedly offered $4.7 billion. Analysts have said private equity firms evaluating Chrysler have deemed the company is worth between $5 billion and $6 billion.

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