Before the rumors start flying, no, I'm not a fortune teller.
Apparently I just read the right news sites -- namely jalopnik.com and thetruthaboutcars.com. For it's there that I found the inspiration for my column, "What America Needs," 18 months ago. In that column, I discussed building a hypothetical car company that could break some serious rules in the auto world and make some serious profits in one of the toughest businesses around. I also mentioned the role that Canadian auto parts maker Magna (NYSE:MGA) might play in such a venture. And I stumbled into an accidental foreshadowing of Friday's news: Magna's on the hunt for Chrysler, and for a chance to make cars itself.
According to news reports from several sources, the Canadian car maker is talking with its German-American counterpart about a bid for all or part of DaimlerChrysler's (NYSE:DCX) Chrysler division. Details remain far from final -- whether such a deal might be structured as an asset or equity purchase, whether the whole or just parts of Chrysler might be for sale, and whether Magna would go solo or in cooperation with one of the three private equity funds recently sighted sniffing around Chrysler HQ: Cerberus Capital Management, Blackstone Group, and Centerbridge Partners.
That said, a Magna deal would seem to make a whole lot more sense than those rumored for Chrysler rival GM (NYSE:GM), which, it would seem, could benefit most by buying Daimler ... and shutting the competitor down forthwith, draining some capacity from the supersaturated global car markets. In contrast to such a scenario, Magna has a vested interest in keeping Chrysler alive and well. Out of its $20 billion in parts sales last year, roughly $2.5 billion was owed to orders from Chrysler proper, and another $2.5 billion from its German siblings. Considering that the weaker Chrysler gets, the fewer sales Magna gets, the Canadians have a real incentive to stop the bleeding south of the border, and the sooner the better -- for their own sake.
Magna's road map
As I alluded to back in 2005, and as suggested by a jalopnik article, rumors have been floating around for some time that Magna wants to make not just car parts, but cars, period. For its part, Magna is on record as disavowing the idea, saying it has no "long-term" plans to make cars itself. But when you consider the position of its money-losing U.S. counterparts, such as Dana, Delphi, and Visteon (NYSE:VC), which are subject to the whims of their equally money-losing customers, you can hardly blame Magna for wanting to sidestep their fate.
By building cars itself, either with or without Chrysler, Magna would at the same time shore up demand for the parts made by Magna proper. Also, it could to some extent free itself from the need to price its wares based less on its cost of production, and more on its customers' ability to pay. What's more, operating in a "welfare state" as it does, a Magna-owned Chrysler might be better able to produce cars free of some of the private pension-and-benefits burdens that the Detroit gang is always complaining of. However, that would entail moving more of Chrysler's manufacturing operations north of the border.
One possible complication: While Magna currently sells about 25% of its parts to DaimlerChrysler, another 40% go to what would become the company's archrivals in the event of a Chrysler purchase: Ford (NYSE:F) and GM (NYSE:GM). But it's unlikely they'd cut Magna off in the event of a Chrysler deal. After all, automotive rivals do business with one another all the time, with Honda (NYSE:HMC) selling engines to other automakers, and Toyota (NYSE:TM) licensing out its hybrid gas-electric technology to all comers.
Sticker price
Canada's The Globe and Mail puts the likely starting price for the entire Chrysler division at $5 billion. However, I expect Daimler could get a bit more than that. Last year, the Chrysler division had $62 billion in sales. At the going rate for similarly unprofitable U.S. auto majors -- less than 0.1 times sales -- that suggests a sales price of about $6 billion.
On the one hand, that sounds like a real bargain when you recall that less than a decade ago, Daimler spent six times that sum to acquire Chrysler in the first place. On the other hand, even $6 billion looks a bit steep for Magna, which at last report had just $1.9 billion in cash ($1.3 billion net of $600 million in debt) and $1.8 billion in available credit lines. On yet another hand, it seems more feasible if, as Magna President Mark Hogan has suggested, the firm is more interested in picking and choosing the parts of Chrysler that it likes best. In such a case, Magna could pick up more than half of Chrysler's assets unaided, with the cash and credit available to it on its own.
New features
Of course, dollars -- whether U.S. or Canadian -- are only part of the consideration paid in any acquisition. In buying Chrysler, Magna would be giving Canada its first "national car company." That's gotta be worth something to the lads from up north. Knowing that, perhaps Chrysler can swing a few perks in this deal.
A lifetime's supply of Molson's for Chrysler management, perhaps? Honorary Canadian citizenship for all Chrysler workers? And for the UAW, guaranteed pensions and nationalized health care for retirees?
With a few concessions like these, I think even American autoworkers would be happy to sing Canada's praises: "With glowing hearts we see thee rise, The True North strong and free! (And don't forget health insurance for me.)"
We're still early in this race, folks, and the story's unlikely to end here. Find out who else might want to own Chrysler in these articles from my Foolish colleague Rich Duprey:
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Fool contributor Rich Smith does not own shares of any company named above. The Fool's disclosure policy wishes toonies were legal tender everywhere.
