A few days ago, I reported that Canadian auto parts maker Magna International took a definitive step toward buying Chrysler by selling $1.54 billion worth of voting shares to Russian Machines. Well, it turns out that New York-based Cerberus Capital Management emerged from the woodwork and won the bidding war with a $7.4 billion commitment to Daimler and Chrysler. Cerberus will pay $6.05 billion to privatize Chrysler and dole out another $1.35 billion to Daimler (DCX – 86.68). The deal easily eclipses the $4.7 billion offered by Magna (MGA – 80.89) and marks the first time a private equity firm has ever taken over a member of the Big 3.
So what does this mean for the parties involved? First and foremost, don't expect Magna to worry too much about losing out on Chrysler. Getting Chrysler at a low price would've made for a nice headline, but gaining a solid foothold in the emerging Russian auto market makes for a pretty nice consolation prize. Look for Magna to turn a solid profit in the international market over the next decade.
As for Chrysler, the situation couldn't have turned out much better, especially with analysts valuating Chrysler at $6-7 billion. Not too often will you find a fallen domestic automaker actually getting fair market value in what essentially amounts to a fire sale. While the final selling price doesn't come close to the $37 billion that Daimler paid for it in 1998, Chrysler really has nowhere to go but up after losing $2 billion in the first quarter of 2007. At the very least, the deal gives prospective drivers a reason to visit showrooms again after a skeptical marketplace wondered whether Chrysler would even survive the next few months.
For Daimler, the deal will cut 2007 net profits by $4-5 billion after the German automaker pays off all the costs involved in the transaction. However, Daimler still made a net profit of $2.64 billion in the first quarter despite Chrysler's struggles and will ultimately benefit from selling off its weakest subsidiary. The German automaker plans to rename itself Daimler AG and investors should expect its stock to hit the ground running.
In the end, Cerberus paid a little extra to lock up a low-priced asset in an attempt to put it back on the fast track to success. The aggressive bid indicates that Chrysler's name still carries some clout and that the investment firm named after the mythological three-headed dog could go to Hades and back to revive a fallen giant.
Disclosure: I do own a mutual fund that may contain one or more of the stocks mentioned in this post. However, any interest that I may own is subject to the discretion of my mutual fund manager.