Thursday, August 30, 2007

Zetsche: Keep Chrysler stake

Charles V. Tines The Detroit News

DaimlerChrysler CEO Dieter Zetsche says holding on to a 19.9% share of Chrysler is good business because it lowers the risk profile for the German company. See full image

DaimlerChrysler CEO sees value in joint projects plus lower risk

Christine Tierney / The Detroit News

Soon-to-be-Daimler AG has reduced its exposure to the turmoil in the U.S. auto industry by selling a majority stake in Chrysler, but it expects to hold on to its remaining 19.9 percent interest in the Auburn Hills carmaker.

"We have no intention whatsoever of divesting this stake," DaimlerChrysler CEO Dieter Zetsche said Wednesday on a teleconference to discuss the company's second-quarter results.

DaimlerChrysler has two principal reasons for retaining an interest in Chrysler -- to express "a vote of confidence" in its former partner, and to support continuing joint projects, he said.

But the link no longer poses a risk to the German automaker.

"You can see the value of that stake relative to our overall balance sheet, and this clearly indicates that a percentage point up or down in the return on that investment does not significantly impact our overall profitability," said Zetsche, who ran Chrysler for nearly five years.

Over the nine-year life of the merger, Chrysler's cumulative contribution to the company was positive, due to a steady stream of earnings from its financial services activities.

But the sharp swings in its automotive operations often marred DaimlerChrysler's results and alarmed investors in Germany's largest industrial company.

"The transfer of the majority in Chrysler has improved the group's risk profile significantly," Zetsche said. "We're opening up a new chapter in our history."

DaimlerChrysler marked the start of a new era by announcing a $10.2 billion share buyback -- a move expected to further bolster the value of the stock.

"The program announced today confirms our confidence in the future earnings power and cash flow generation of the new Daimler," Finance Director Bodo Uebber said on the call.

DaimlerChrysler shares finished up $3.27, or nearly 4 percent, at $87.61. They have appreciated dramatically from a low point of $48.46 in the past year.

DaimlerChrysler said it expected to book a $3.4 billion charge in its 2007 results for the Chrysler sale -- less than the $4 billion to $5 billion it estimated in May when it announced the $7.4 billion deal.

Confusing quarterly report

The transaction, which closed on Aug. 3, complicated the Stuttgart, Germany-based automaker's second-quarter reporting.

DaimlerChrysler disclosed some of its second-quarter results on July 25, including higher profits at the Mercedes Car Group and the heavy-truck division.

On Wednesday, it announced a drop in net profit to $2.5 billion in the second quarter from $2.9 billion a year earlier, due in part to weaker results at Chrysler.

But DaimlerChrysler did not break out Chrysler's earnings. They were included in the results from discontinued operations showing a $549 million profit.

"We do not comment on the Chrysler Group," Uebber said when asked about Chrysler's results. Still, he indicated Chrysler's operations, including financial services, were around break-even for the quarter.

Excluding a big gain due to a halt in May in Chrysler depreciation accounting, and the cost of the early redemption of some long-term bonds, "you get to zero, and that reflects the operating performance of Chrysler," Uebber said.

Analyst David Healy at Burnham Securities said the company's "puzzling financial statement" made it difficult for analysts to assess Chrysler's performance. "None of us have been able to figure it out," he said.

In the second quarter of 2006, Chrysler was profitable, reporting earnings of $66 million for its automotive operations and generating a substantial portion of the financial services division's $550 million profit. But the Chrysler Group -- the automotive operations -- sank into the red in the third quarter, hardening the opposition of investors and managers in Germany pushing for a break with Chrysler.

The smallest of Detroit's automakers, Chrysler was buffeted by the troubles in the U.S. industry. Compared with its rivals, it relies even more on truck and minivan sales that have suffered recently.

Chrysler had no comment on the second-quarter results.

Companies keep joint projects

Now privately owned, it is not required to issue quarterly earnings reports.

DaimlerChrysler, which is changing its name to Daimler AG, said the bulk of the charge for the Chrysler sale would be booked during the third quarter.

The companies still plan to cooperate on several projects, such as the platform, or underbody, for SUVs, and share some diesel and hybrid technology.

DaimlerChrysler's second-quarter results also were skewed by a onetime, prior-year gain due to the revaluation of derivatives on part of its stake in European Aeronautic Defense and Space Co.

That was a factor in the decline in DaimlerChrysler's earnings before interest and taxes to $2.9 billion from $3.2 billion in the second quarter of 2006.

On July 25, DaimlerChrysler reported a 74 percent surge in pre-tax earnings at the Mercedes Car Group to $1.6 billion and targeted a rich 10 percent return on sales for the luxury carmaker by 2010 at the latest. The heavy-truck division also posted a 3 percent rise in profit, despite weakness in the North American market.

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