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"Chrysler Sale is all but certain"


Chris_Doane

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Speculation. So far that’s all we really have. Since Chrysler’s restructuring plan was announced February 14th, the speculation machine has been set to “puree.” We haven’t seen a frenzy like this since the days of GM’s supposed, impending bankruptcy.

Just to review, on February 14, 2007, DCX announced a restructuring plan for the Chrysler group that consisted of 13,000 job cuts, plant closures and a reduction in the number of cars Chrysler would build each year. Then we also had the magic words from Dr. Z:

"We do not exclude any option in order to find the best solution for both the Chrysler Group and DaimlerChrysler," he told a news conference. "This means all options are on the table."

If a company is in big trouble, of course they will look at all options.

It’s very possible my thoughts that follow are totally wrong. If they are, I’ll be the first to say “yep I wasn’t even close on that one.”

That said, these are the things that make me think a sale of Chrysler is not imminent:

GM and Ford have restructured, now it's Chrysler's turn.

Leading up to Valentines day 2007, Dr. Z had not been feeling the love from the German shareholders. They were unhappy with the Chrysler group’s woes bringing down the DCX business as a whole. Hard to blame them.

Among other things, Joe Eberhardt's sales bank had become a total disaster with unsold trucks sitting all over Detroit. Sales for 2006 were down 7% from 2005. Pretty rough when you consider 2005 sales were up 5% from 2004. Clearly it was time for some new thinking at Chrysler. First, Mr. Eberhardt was more/less shown the door at end of 2006. Officially he stepped down, but...uh....yea. Then on the February 14, a restructuring plan was presented much like GM and Ford had already done. The plan would cut costs and get Chrysler back to profitability by 2008. Of course there was the “all options” comment as well.

48 hours later, the speculation train had left the station and was steaming away at full speed. Some might suggest it was DCX’s intention to drive the stock price up with their “all options” comment. I’m not ready to say that was intentional, but Zetsche had to say or do something to get the shareholders off his back. Perhaps the “all options” comment was just something for the share holders to grasp at while LaSorda and Zetsche work frantically the next 5-6 months to get things turned around? However if giving a bump to the stock price was DCX’s intention, it may have worked a little too well. I’ll address that further down.

Dr. Z's quotes since Valentines Day

Since February 14, there have been more than a few occasions where Dr. Z was quoted saying things that suggested the Chrysler group wasn't necessarily for sale and that it was entirely possible that DCX would keep Chrysler for the time being. Why would he keep reiterating this idea? To me, for a guy who said all options were on the table, he sure sounded like someone trying to hint that the Chrysler group may very well not end up being sold. I really feel there was at least some effort to downplay the idea of a Chrysler sale.

Now obviously the financial analysts and fund managers weren't having any of that view. But what did they care? With the stock up $10-$20 on rumors, they were bathing in money. With the additional rumors about an announcement at the shareholder meeting in Germany on Wednesday, the stock has closed today at $84.02. However there is an interesting story that just hit the wires as I write this about that shareholder meeting. I’ll address that separately.

There is a plan

In all the speculative stories about Chrysler’s sale, it seems to have been lost that they have a plan to turn things around. The plan was unveiled about 45 days ago. They say it will get the Chrysler group back to profitability by 2008. Now whether they can actually achieve that is anyone’s guess, but it seems like there is enough there to give it a little more than 45 days. The example GM is currently setting shows these plans can work. Now if the Chrysler group were to be showing no signs of hope in 8-12 months, then yes, I suppose I could see DCX just wanting to get rid of them at any cost.

In the very recent past, it was the M-B group in trouble and needing a restructure while the Chrysler group was humming along. The shareholders threw a $h!-fit then, and M-B got things going back in the right direction. Now that the roles are reversed, it would only seem logical that the Chrysler group would at least be given a chance to execute a similar restructure. A chance that amounts to more than 45 days anyway.

Haven't we heard this song before?

All this speculation starts to remind me of all those "GM is going to file for Chapter 11 soon" stories we had back in 2005. Delphi was in big trouble and GM was too. Then Delphi filed for chapter 11 and lots of people were saying GM was next. Didn't happen. Instead of declaring bankruptcy, they announced a restructuring plan, sold 51% of GMAC, and oh yea, got Captain Kirk for a year. Today, a lot of those same people who were dooming GM then are the ones saying the sale of Chrysler is a done deal. Hmm.

While the situations surely differ, GM and DCX are both global auto manufacturers that had, or have, some similar problems. So far, GM’s restructuring plan is addressing these problems without totally decimating the structure of GM as we know it. I don't mean to trivialize the large layoffs at GM. My point is that nothing insane, like selling off or closing Buick, Pontiac and GMC, had to happen. DCX’s plan for Chrysler could work as well.

UAW

There is another theory floating around that the whole thing is a ploy on DCX’s part to get concessions from the UAW on health care. Normally I would totally brush that idea off as being far too conspiracy theorist. However when you factor in that the UAW has given GM and Ford concessions, but not Chrysler, it becomes maybe...slightly believable? News reports late last week had the UAW reconsidering some concessions for DCX after their two-day bargaining convention in downtown Detroit. If the UAW were to give concessions to DCX, the outlook for Chrysler could change quickly.

Bad for Daimler?

If DCX were to sell Chrysler, Daimler themselves could become a takeover target. Something Dr. Z acknowledged a few weeks ago.

DaimlerChrysler CEO Dieter Zetsche alluded to other pressures bearing on the Stuttgart, Germany-based automaker - the risk of a possible takeover of the company.

"In today's world, a 50 billion euro ($65 billion) market cap doesn't protect you from those considerations," he said in wide-ranging talks with reporters.

The fact that Dr. Z even mentioned this in public suggests to me that he might not be too hot on the idea of selling Chrysler just yet. Hyundai/Kia talked again recently about their desire to start a Lexus like luxury brand. To think they, or a private equity group, couldn’t come up with the financing to make a run at a Chrysler-less Daimler is foolish. The same could probably be said for a Chinese company or two.

Merger at last

There are meaningful joint Chrysler/M-B projects now in the pipeline. I know, 9 years later and now the merger finally amounts to something?? That said, things are in the works. Things that would help business cases for Chrysler AND M-B.

No news at the shareholders meeting?

The breaking story I referred to earlier is that reports now say there will be no talk about a potential sale of Chrysler at the shareholder meeting Wednesday.

http://www.reuters.com/article/mergersNews...228950120070402

Assuming that’s true, it could suggest things in either direction. Maybe the idea is dead in the water? Maybe they need more time to work a deal? Maybe it doesn't mean anything? We’ll have to wait and see what, if anything, transpires.

Bids

Bids will surely come in for the Chrysler group. It seems there will be three. Blackstone, Cerberus and perhaps a Magna/Ripplewood offer. To many, it seems a forgone conclusion that DCX will accept one of them. I feel like Im stating the obvious here, but, DCX doesn’t have to do anything with any of those bids. “Thank you very much, we will study your offer,” is all we may hear about the bids for a while. Perhaps it was the news that these private equity groups were "in the building" or "looking at the books" with JP Morgan that made several think a sale will absolutely happen. Again though, DCX said they would explore all options. We knew this would be one they'd look at. So far no guarantees of a sale, just other companies saying "hey can we take a look" and DCX saying "OK."

Why now?

With all the problems Chrysler has lately, it’s not the best time to sell. Chrysler is undervalued. That’s why the private equity firms want to try and snatch it up now. They see potential for a few billion in profit. However there is no reason DCX couldn’t realize that few billion on their own. If DCX thinks they can get Chrysler “fixed” and profitable in 1.5-2 years, why not wait until then to sell? If a broken Chrysler would sell tomorrow for $6-7 billion, would a fixed Chrysler sell for $10-11 billion (more?) in 1.5-2 years? Of course “the big if” is whether DCX has faith in this restructure. So far, the public comments indicate they do. What they are saying behind the closed doors of the boardroom could be totally different.

Stock price problem/What could actually happen?

Those are my thoughts on why I think DCX won't sell Chrysler now. However, even if I’m right, there is still a problem. $84.02. The price DCX stock closed at today (4/2/07.) All that from rumors and speculation. The feeling now is, with the stock price climbing so high, DCX has to do something significant to preserve as much of those gains as possible.

Let’s assume that, for the time being, DCX doesn't want to sell Chrysler. Let's also assume they've looked at some other options that make good business sense and would counteract a steep drop in stock price from a "no sale" announcement. What could those other options be?

-- A separate stock listing for Chrysler. This was an idea being floated several weeks ago, though apparently, forgotten about lately. If the German shareholders think they will do better on their own, let them be on their own. Not only would they be happier, but it would surely give Chrysler more incentive to get things turned around.

-- A total, or controlling stake, sale of Chrysler Financial. Cerberus snatched up 51% of GMAC, maybe they’d like to get in on Chrysler Financial too?

-- The sale of other assets? Perhaps parts of the commercial truck group? Some or all of Mopar? Though probably not Smart and certainly not the Dodge, Jeep or Chrysler brands alone.

-- Announce they have confidence in the turn around plan and go into very specific detail about how Chrysler will be turned around. Whether this alone would do much to avert a steep drop in stock price is questionable. The details would have to be pretty convincing.

-- All of those things? None of those things?

Hurry up and wait

DCX has said they don't want to draw things out and will make an announcement about their intentions soon. However, discussion of the possible sale of Chrysler is not on the agenda for the shareholders meeting. The only remotely related item is a vote on returning the name of the company to Daimler-Benz if Chrysler is not disposed of by March 2008. DCX is recommending the shareholders vote against this proposition.

So, when will we have answers to any of this? Uh...”soon”?

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I read your post and I think you're spot on, except for that "smoke screen b.s." commment: It wouldn't be smart not to evaluate all options, including the sale, hence the PE funds meetings with Chrysler management. But it would also be plain stupid not to evaluate the possibility of restructuring (i) of Chrysler only or (ii) of the entire group, including a full merger. Business Basics says "study all of your your options on underperforming units: restructure, sell or shut down".

I think "Hurry up and wait" sums up what rational people should feel, even though wearing my professional hat, I would like to see a transaction like this taking place in the Auto Sector, and mainly to see how would Chrysler and Mercedes look like in 5 years to 10 years. :AH-HA_wink:

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-- The sale of other assets? Perhaps parts of the commercial truck group? Some or all of Mopar? Though probably not Smart and certainly not the Dodge, Jeep or Chrysler brands alone.

Good point. Mopar is profitable and DCX has long standing offers by purchasers. Additional this is exactly what they did in the 80's turnaround (in that case they sold the real estate holdings of Mopar and then leased them back)

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