Friday, May 18, 2007

Cerberus vows patience

Snow sees long-term value, backs Chrysler's redo plan

David Shepardson / Detroit News Washington Bureau

WASHINGTON -- Cerberus Capital Management LP Chairman John W. Snow said the private-equity firm will take a hands-off approach to running Chrysler and has no timetable for demanding the automaker make money.

Snow strongly endorsed Chrysler's management team, including CEO Tom LaSorda, and said he believes the automaker's turnaround plan will work.

Auburn Hills-based Chrysler, which lost $680 million last year and $2 billion in the first quarter this year, is eliminating 13,000 jobs, closing one factory and cutting shifts at several more to restore profits in 2008.

"We're not putting a clock on it," Snow said in a telephone interview Thursday from his home near Richmond, Va. "We're patient. We can take a long view. We can look over the horizon. So next quarter's results or the quarter after that aren't what gets our primary attention.

"What gets our primary attention is, 'Are we building a better business?' "

On Monday, DaimlerChrysler AG said it would sell an 80.1 percent stake in Chrysler to Cerberus in a $7.4 billion deal that's expected to close later this year. The German automaker will retain a 19.9 percent stake as it unwinds the landmark1998 merger that joined upscale Mercedes-Benz with mass-market Chrysler.

Cerberus has a number of automotive assets and hasn't been afraid to reshuffle management at underperforming businesses.

A former railroad executive and one-time Bush administration Treasury secretary who joined New York-based Cerberus in October, Snow said Cerberus is considering other automotive deals, but he declined to be specific. Nor would he discuss the firm's planned withdrawal of its $1.7 billion bid for a stake in bankrupt supplier Delphi Corp.

"We're acquiring a lot of auto assets because we think the auto industry has been undervalued, but these are stand-alone assets. We think it's a good sector that's poised for better results."

Peter Morici, a professor at the University of Maryland School of Business and former chief economist at the U.S. International Trade Commission, said he expects Cerberus to maintain Chrysler's management team. But he predicts the private-equity firm will be eager to see Chrysler demand cuts in labor costs from the United Auto Workers during contract talks this summer.

"The basic problem at Chrysler is not the management and it's not the engineers," Morici said. "The problem is the labor contracts. You can't just dump these people and have three or four talented guys at Cerberus running the place It takes a lot more than that to run a company."

Cerberus, founded as an obscure $10 million fund in 1992 that mostly purchased debt, has in recent years bought everything from car rental companies to smaller auto suppliers and now has $22 billion in assets. It owns stakes in Air Canada, Mervyn's department stores, Albertson's grocery stores and Italian shoemaker Fila. It is part of a wave of private-equity funds increasing investments in the auto industry and across the economy.

Last year, Cerberus paid $14 billion for a majority interest in GMAC, the mortgage and lending business previously wholly owned by General Motors Corp. It recently replaced the CEO of one GMAC unit, although the new CEO came from within the finance company.

Cerberus recently agreed to buy the assets of Tower Automotive Inc., a bankrupt supplier in Novi, for $1 billion. It also owns Guilford Mills, one of the largest automotive seating suppliers in the United States, as well as suppliers in Michigan and Germany.

Snow said Chrysler would not be required to buy parts from Cerberus-owned suppliers if it found quality, competitively-priced products elsewhere, but he said it isn't clear whether Cerberus will look for synergies between Chrysler and its other auto companies. "It's too early to say," he said. "That would only be done with deep consultations and thoughts of the management team.

Snow said Cerberus' Chrysler investment is meant to "help turn the company around, produce better results and reward, ultimately, our investors."

Private equity offers Chrysler "the best chance" to restore profits, he said.

Snow emphasized that LaSorda would be accountable for the results, but Chrysler would be able to tap the talents of a team of Cerberus executives with experience turning companies around.

"(The Cerberus) model -- which gets real close alignment between managers and owners -- incentivizes the process in ways that produce good, strong results," Snow said.

Snow sidestepped several questions, including who would comprise the board of directors for Chrysler, which will be renamed Chrysler Holdings LLC, and whether LaSorda would report to a specific Cerberus executive.

But in an interview Thursday on WJR Radio, LaSorda said Wolfgang Bernhard will be "a direct interface to the investors and to us."

Bernhard, who played a leading role in Chrysler's turnaround early this decade, is among several former auto executives now with Cerberus.

The firm's auto team is led by former Ford Motor Co. senior executive David Thursfield and includes ex-Ford sales chief Robert Rewey and Gary Dilts, Chrysler's former top sales executive.

Despite the myriad challenges facing Detroit automakers in the brutally competitive global auto industry, Snow said Cerberus is optimistic about the sector and Chrysler, especially as a private company.

"Often, managements find themselves constrained by public markets that don't let them take the longer view," he said.

"Companies find themselves in circumstances where the investment required to pursue long-term, best strategies for the company gets compromised by the need for short-term results. We will not let that happen."

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