The nightmare in Stuttgart that began in 1998 for DaimlerChrysler (NYSE:DCX) -- or should we just say Daimler? -- may be coming to an end. The company announced today that it is selling an 80.1% stake in Chrysler to private equity firm Cerberus.
Unfortunately, with a nightmare like this, it's tough to expect the German parent to just rub its eyes, say "Gott sei Dank!" and be done with it -- especially when it's retaining nearly 20% of the company.
According to the DaimlerChrysler filings, Cerberus will pay $7.4 billion for its majority stake in Chrysler. Of that $7.4 billion, though, roughly $5 billion will go directly into the newly formed Chrysler Corporation -- the industrial arm that will actually make the cars -- and $1.1 billion will be put into Chrysler Financial Services in order to strengthen the financial position of the respective units.
DaimlerChrysler will get the remaining $1.3 billion, but once you net out a $400 million loan it's giving to the Chrysler industrial business, and the $1.6 billion it expects to take in losses between now and the close of the transaction, DaimlerChrysler actually expects to shell out $700 million in cash in the process of unloading the Chrysler business. And that's all despite the fact that Cerberus's price tag is a far cry from the $38 billion that the former Daimler-Benz paid to acquire Chrysler back in '98.
Despite some potentially good deal points, this won't be any walk in the park for Cerberus. After making a slim profit in 2004 and 2005, the Chrysler group fell into the red for 2006, losing $1.5 billion on the operating line on $62 billion in sales. Both revenue and unit sales fell 6% for the year, as competition from overseas rivals like Honda (NYSE:HMC) and Toyota (NYSE:TM) took a toll. And though DaimlerChrysler has agreed to deliver the Chrysler industrial business free of debt to the buyers, Cerberus will inherit Chrysler's pension and health-care obligations, as well as the headaches that come from dealing with the hard-nosed United Auto Workers union.
The two groups expect the transaction to close in the third quarter of this year. Afterward, DaimlerChrysler expects to hold a shareholder vote on changing the name of the company to simply Daimler AG. Sometimes, it's not about what's in a name, but what's no longer in your name.
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Fool contributor Matt Koppenheffer drives a Honda Civic, but with the understanding that Honda also employs a heck of a lot of Americans. He does not own shares of any of the companies mentioned. The Fool's disclosure policy drives a sensible Prius, because it cares about future generations of little disclosure policies.
