Chrysler Experience Wasn't `Failure,' Zetsche Says (Update2)

By Jeremy van Loon and Greg Miles

May 18 (Bloomberg) -- DaimlerChrysler AG Chief Executive Officer Dieter Zetsche said his time leading Chrysler, the carmaking division being sold to Cerberus Capital Management LLC, wasn't a ``failure.''

Zetsche ran Chrysler between November 2000 and September 2005, and ``those five years were the best in my professional, even personal, life and I don't consider that as a failure,'' the CEO said in an interview today at the Stuttgart, Germany, headquarters of DaimlerChrysler, the world's second-biggest maker of luxury cars.

The 1998 merger of then Daimler-Benz AG and Chrysler Corp. didn't destroy $36 billion because Daimler didn't use cash to buy Chrysler, instead merely trading shares, he said.

Zetsche on May 14 announced the sale of Chrysler to Cerberus, which will invest $7.4 billion as part of the transaction, in an effort to minimize the risk to profit growth. Zetsche today said he decided to sell Chrysler because, even if the U.S. division reaches a possible profit margin of 5 percent, the unit would still ``drag down'' the rest of the company.

``Chrysler had a couple of good years on the strength of the 300C in the 2003 to 2005 time frame,'' said John Novak, an analyst at Morningstar Investment Services of Chicago. ``Last year, they ran into problems with inventory management. Their lineup looks relatively weak.''

Shares Rise

Shares of DaimlerChrysler in Frankfurt rose 32 euro cents, or 0.5 percent, to 64.40 euros. The stock has gained 58 percent over the past 12 months, beating the 24 percent increase in shares of competitor Bayerische Motoren Werke AG. DaimlerChrysler stock on the merged company's first day of trading Nov. 17, 1998, cost the equivalent of 71.22 euros.

The perceived risk of owning debt sold by DaimlerChrysler today extended yesterday's decline. Credit-default swaps based on 10 million euros ($13.5 million) of DaimlerChrysler bonds has fallen 60 percent over the past year to about 23,000 euros today, according to Bloomberg data. A decline in the price of the contracts indicates an improvement in the perception of creditworthiness.

First-Quarter Loss

Chrysler posted a loss in the first quarter of 1.49 billion euros compared with a profit of 641 million euros a year earlier. The loss includes reorganization expenses of 941 million euros.

When asked what the risk was to Daimler in the event of a possible bankruptcy of Chrysler, Zetsche said ``basically none.''

Chrysler since 1998 has posted annual profits of as much as $5 billion and losses almost as large, increasingly becoming the target of investors' ire. Its latest tailspin marked a third descent into losses since Lee Iacocca saved the automaker from bankruptcy 25 years ago.

``You pay lawyers to look at scenarios,'' Zetsche said. ``Chrysler will be fine and a very good company in the future.''

Chrysler CEO Tom LaSorda is in the midst of a restructuring designed to reduce costs, including shedding 13,000 jobs and closing a Delaware manufacturing plant by 2010. The fourth- largest U.S. carmaker has a target of earnings before interest and tax as a percentage of sales of 2.5 percent by 2009.

The division last year lost 500 million euros last year and ceded market share to Toyota Motor Corp. while relying too much on the stagnant North American market. Zetsche failed to keep the U.S. carmaker profitable after completing a reorganization he began as head of the business.

Ranking Fourth

DaimlerChrysler was formed when Stuttgart-based Daimler-Benz bought Auburn Hills, Michigan-based Chrysler for $36 billion in what the German carmaker billed as a ``merger of equals.'' Chrysler now sells fewer cars in the U.S. than General Motors Corp., Ford Motor Co. and Toyota.

Under the agreement announced this week, New York-based Cerberus will buy 80.1 percent of Chrysler, with Daimler holding the remaining 19.9 percent, and a new company will be formed to be called Chrysler Holding LLC. The sale will be completed in the third quarter.

Of Cerberus's total contribution, $5 billion will flow into the industrial business of Chrysler and $1.05 billion into Chrysler's financial services business, while Daimler gets the balance. Daimler will end up paying $650 million in the transaction, including granting a loan of $400 million to Chrysler.

Chrysler-Mercedes Projects

Existing projects with Daimler's Mercedes Car Group unit will be continued and a joint council, consisting of management board representatives, will be formed to discuss cooperation.

``There maybe was a way it could have worked,'' said David Herro, who manages about $70 billion as chief investment officer of international equities at Chicago-based Harris Associates LP ``And here's another try. Chrysler does have potential.''

Mercedes is targeting 5 percent to 6 percent potential sales growth, Zetsche said. The chief executive didn't exclude the possibility of future acquisitions or partnerships. The Mercedes Car Group ranks second worldwide behind Munich-based BMW in making luxury vehicles.

The company's current market value of 66.3 billion euros protects it from a takeover, Zetsche said. Daimler is estimated to have a fair value of 70 billion euros to 90 billion euros by analysts, he said.

DaimlerChrysler's largest shareholders, including the Kuwaiti investment authority, which owns about 7 percent of the carmaker, would step in to help in the event of a hostile takeover, Zetsche said, adding that he's ``happy'' with the current shareholder structure. He didn't exclude the possibilities of changes to that structure in the future.