Kerkorian offers $4.5B for Chrysler

Maverick financier proposes to take troubled automaker private, offers stake for UAW; Daimler stock rallies.

By Chris Isidore, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) -- Kirk Kerkorian, once the biggest shareholder of Chrysler Corp., has sent a letter to DaimlerChrysler offering to buy the struggling automaker back for $4.5 billion.

Kerkorian is proposing to take the struggling automaker private, and his bid is contingent upon reaching a deal on a new labor agreement with the United Auto Workers union.

Financier Kirk Kerkorian, who is offering $4.5 billion for Chrysler.
Financier Kirk Kerkorian is offering $4.5 billion to buy the troubled automaker Chrysler from the German company he once sued for $9 billion.
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His letter, released to the public, says he would offer ownership stakes to the union and its membership as well as Chrysler management were he to buy it.

He also said the offer is contingent on reaching what he called an "equitable arrangement" with DaimlerChrysler for it to assume some of the unfunded pension liabilities and health care costs of Chrysler retirees. But he said the cash offer is not contingent upon arranging financing.

DaimlerChrysler (Charts) shares closed up 4.6 percent Thursday in New York trading after the midday announcement. Shares of General Motors (Charts) rallied as well to gain nearly 3 percent.

Kerkorian's letter offers to give DaimlerChrysler a $100 million escrow fee, a quarter of which he said he would forfeit if he were to walk away from the deal after conducting due diligence.

Han Tjan, a spokesman for DaimlerChrysler's New York office, had only limited comment, saying, "We do confirm that we are potential interested partners. All options are open. We do not have any further comments."

A UAW spokesman was not immediately available for comment, nor was any spokesman for Kerkorian.

In addition to releasing Kerkorian's letter, the financier's investment firm also released a letter to DaimlerChrysler from Jerry York, his adviser and a former Chrysler executive who helped to lead a previous turnaround at the company. In the letter he argues that fixing the problems at Chrysler would be easier for an independent but privately held company.

York's letter said Kerkorian would "offer a substantial portion of equity in the company to the UAW as part of finding a solution to ever-rising healthcare costs, which not only are unaffordable by corporations, but over time will likely prove to be unaffordable by governmental entities as well."

However, Erich Merkle, an analyst with IRN, told Reuters the $4.5 billion offer sounded on the low side. "I think Chrysler can probably fetch some place higher than, say, $5 billion," Merkle said, but added that it was "really damaged merchandise" right now. "I know Blackstone had offered $4.6 or $4.7 (billion) a few weeks ago," Merkle said.

But David Cole, chairman of the Center for Automotive Research, said that if Kerkorian is successful in bringing the unions on board with his bid, it could give him an edge against rivals.

"The estimates of what Chrysler is worth range from zero to $10 billion," he said. "What underlies this is where does labor fit into the picture, with Chrysler's health care obligation," which he estimated at about $15 billion.

Cole said the unions didn't particularly see Kerkorian as a friend during his previous time at Chrysler, but that he might be preferable to some of the private equity buyers now looking at the company. Last week United Auto Workers union President Ron Gettelfinger said the interest of such firms in Chrysler and numerous auto parts maker was a justified source of apprehension for employees.

"It is unfortunate that many of them are out to increase their wealth by stripping and flipping the companies," he warned.

Cole said Kerkorian, with an offer of equity to the unions, could be seen as the lesser of evils by both union leaders and rank-and-file members.

"Labor is extremely suspicious of private equity," Cole said. "That might make them flexible in the kind of deal they could put together," he added, referring to the unions at Chrysler. "I wouldn't be surprised if Jerry York has already reached out to them."

It's not clear if Kerkorian's past battles with DaimlerChrysler would hurt his bid. His attorney, Terry Christensen, told several papers that J.P. Morgan Chase, which is handling the bidding process for the automaker, had not provided Kerkorian with the same so-called bid book of confidential financial information provided to other potential buyers, and he had made the bid based only upon public documents.

But Cole said that if Kerkorian can come up with the most valuable bid, he doubts DaimlerChrysler would turn it down.

"It's clear they want Chrysler gone and they want the best return possible on it," Cole said. "Generally the smart people will go with who will give them the best deal, and the best deal will somehow have to involve labor."

DaimlerChrysler Chairman and CEO Dieter Zetsche confirmed at the company's annual meeting Wednesday that it has been in discussions with buyers who had shown "clear interest" in the company's North American unit, which lost $1.5 billion last year and is not projected by the company to return to profitability until 2008.

The unit was essentially put up for sale on Feb. 14, when Zetsche said Daimler would look at all options for the company, the same day he and Chrysler executives unveiled a turnaround plan that called for the automaker to close plants and cut 13,000 jobs, about 16 percent of its North American staff.

The company's labor agreement with the UAW runs through September, as do similar agreements between the union and General Motors and Ford (Charts). All three U.S.-based automakers have been losing share to Asian automakers such as Toyota Motor (Charts), which operate nonunion plants. Toyota passed DaimlerChrysler in U.S. sales for the first time in 2006 to take its traditional No. 3 ranking.

While Chrysler has been losing money, it does have some attractive assets, notably Jeep, and is reported to have attracted bids from some of the nation's largest private equity firms, including the Blackstone Group and Cerberus Capital Management, as well as from a Canadian parts supplier, Magna International (Charts).

Kerkorian's most recent investment in the auto industry did not go well. He started buying shares of GM in 2005, and boosted his stake to 9.9 percent. His associate, York, was put on GM's board.

Kerkorian and York pushed GM to cut pay for top executives and directors and slash its dividend in half in an effort to win support of the unions there. But he was unsuccessful in his efforts to get GM to join an alliance with Japanese automaker Nissan (Charts) and French automaker Renault, which own stakes in one another and share a CEO, Carlos Ghosn.

Kerkorian's filings with the Securities and Exchange Commission show that he lost about $8.6 million buying and selling GM over a 19-month period, although dividends from the troubled automaker allowed him to walk away with more than $100 million in cash from the investment.

Kerkorian first started buying shares in Chrysler in 1990, paying $272 million for 22 million shares. He eventually held 36 million shares, or about a 10 percent stake in the company, making him the largest shareholder. He soon started pushing management to take steps to boost the stock.

In April 1995, he launched a $22.8 billion hostile bid for Chrysler. Among those in his group was former Chrysler CEO Lee Iacocca, the fabled auto executive who had been credited with turning around the company with the help of a government bailout, avoiding a bankruptcy.

Kerkorian's attorney Christensen told the New York Times that Iacocca is supporting this latest bid for Chrysler as well, although it's not clear if he would be taking part, or if he would rejoin the company if it was successful. Efforts to reach Christensen and Iacocca Friday were not successful.

Kerkorian eventually dropped his bid for Chrysler in February 1996 when the company agreed to put one of his advisers on its board. He retained his stake in the company and his actions were seen as having led the company down the path that led to the deal with Daimler-Benz in 1998.

Daimler-Benz paid $37 billion for Chrysler, making Kerkorian billions on his investment. He initially praised the deal and retained his stake in the combined company for several years.

But he soon fell out with DaimlerChrysler leadership, accusing them of disguising an acquisition as a merger of equals between the German and American automakers that did not pay a sufficient takeover premium.

In November 2000 he sued DaimlerChrysler for $9 billion, and he subsequently sold his remaining stake in the company. His suit was dismissed in April 2005.

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Kirk Kerkorian, once the biggest shareholder of Chrysler Corp., has sent a letter to DaimlerChrysler offering to buy the struggling automaker back for $4.5 billion.
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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.