Tuesday, May 15, 2007

Magna's loss may be a blessing

A worker installs a dashboard in a Jeep Cherokee at a DaimlerChrysler assembly plant.
May 14, 2007 05:40 AM

Business Columnist

Good news for Magna International Inc., even if founder and controlling shareholder Frank Stronach won’t see it that way: Magna has been aced out of the bidding for troubled Chrysler Group by New York-based private-equity firm Cerberus Capital Management LP, in a surprise turn of events formally announced Monday.

Which means Cerberus, not Magna, will have the unenviable task of subjecting Chrysler to its third restructuring of the past few years, and live up to its name, which refers to the mythological three-headed dog that guards the gates of Hades.

It’s tough to make a case for Chrysler’s continued existence, given its dwindling market share and No. 4 ranking in North America, its only substantial market. Making it a viable enterprise will require shrinking its workforce by as much as 25,000 jobs, more than the 13,000 cuts to which Chrysler is already committed.

Under new management, Chrysler will also have to shutter more than the one assembly plant, in Delaware, that’s slated for closure. And in upcoming contract negotiations with the United Auto Workers in July, the unlucky winning bidder will have to push hard for labour concessions on pension and healthcare benefits, and somehow re-finance Chrysler’s estimated $20 billion (U.S.) in unfunded pension liabilities.

Magna’s rationale for taking on the saviour role at Chrysler was to preserve the 25 per cent of the revenues it derives from Chrysler, its biggest customer. But the likely outcome, given Magna’s lack of experience in the design and marketing of vehicles and handling of dealer relations, is that Chrysler would continue to be a money pit, and Magna itself would be distracted from its core business, including its ambitious plans for expansion in Europe and Asia.

Until last week, Magna was seen as the frontrunner to relieve DaimlerChrysler AG of its mass-market operation in the New World, purchased for a whopping $36 billion (U.S.) in 1998. Nine years later, the Germans might walk away from the failed experiment with sale proceeds of as little as $7.4 billion (U.S.).

Magna has elaborate ties with DaimlerChrysler as a longtime supplier to Chrysler that also builds complete vehicles for DaimlerChrysler and other automakers at its assembly plant in Graz, Austria. Magna had lined up the essential union-leader support for its bid. And as recently as last Friday, Michigan Governor Jennifer Granholm emerged from a meeting with Stronach at Magna headquarters in Aurora, pronouncing favourably on Magna’s bid.

The trump card for Cerberus, which has stakes in companies in a variety of industries with total revenues of some $60 billion (U.S.), likely was its hiring of Wolfgang Bernhard as a consultant.

Bernhard, who has been hanging around Chrysler headquarters in Auburn Hills, Mich., for the past few weeks, was Chrysler’s chief operating officer from 2000 to 2004. He’s a known quantity well-liked by many top Chrysler execs. And he was joined at the hip with Dieter Zetsche, now CEO of DaimlerChrysler, when the two men were dispatched from Stuttgart to fix the Germans’ struggling acquisition.

Magna, meanwhile, stumbled with the timing last Wednesday of its announcement that Russian oligarch Oleg Deripaska will inject $1.5 billion (U.S.) into Magna and become an equal partner with the Stronach family in controlling the company.

Washington is deeply suspicious of Deripaska, to the extent his visa has been lifted by the U.S. State Department, denying him the ability to travel in the United States.

Deripaska is a wily survivor of the violent “aluminum wars” of the 1990s, in which several executives of Soviet-era smelters were murdered as they literally fought for control of an industry that was auctioned off at sweetheart prices to a favoured few with the right connections.

How Deripaska came to his current status as owner of Russian Aluminum, a consolidator of Russian aluminum enterprises that is now the world’s biggest aluminum producer, is unclear. Save that the billionaire married into the family of then-Russian president Boris Yeltsin, and is regarded in Washington as a close ally of Yeltsin’s hand-picked successor, Vladimir Putin.

As Putin has grown more autocratic in recent years, U.S.-Russian relations have cooled. The same U.S. political forces that thwarted a Dubai company’s bid to acquire ports on the U.S. Eastern Seaboard and a Chinese state firm’s bid for U.S. oil producer Unocal Corp. would almost certainly subject a Magna bid for Chrysler – which supplies the Pentagon with vehicles – to prolonged scrutiny. Meanwhile, Zetsche has promised his impatient supervisory board in Stuttgart that the Chrysler question will be resolved by year-end.

Magna hasn’t been counted out by industry experts, who note that a Cerberus deal is hardly a sure thing. Only now, as final bidder, will the private-equity firm be able to get under the hood and do more than the cursory due diligence that has carried Cerberus this far.

Cerberus recently walked away from what appeared to be a certain commitment to lead a buyout of the near-insolvent auto-parts maker Delphi Corp. when it couldn’t secure the labour concessions it sought.

Magna should take a pass if given a second opportunity to bid, and let one of the two other disappointed Chrysler bidders, Blackstone Group and Kirk Kerkorian, take the booby prize.

If Chrysler is to be chopped down to a financially viable size, best to leave the grisly task to a speculative private-equity buyer.

There are automakers in the wings eager to cherry-pick Chrysler’s best assets, including its Jeep brand and minivan franchise.

But “they’re waiting for the private equity companies to do some of the clean-up work to make Chrysler an attractive deal,” David Cole, chair of the Michigan-based Center for Automotive Research, told Bloomberg News yesterday, “where right now it probably isn’t.”

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