Wednesday, October 22, 2008

Nissan seeks Chrysler stake

The Detroit News Reports:

Ghosn's proposal: Chrysler would be partner with Renault-Nissan
Christine Tierney, Robert Snell and David Shepardson / The Detroit News
The Renault-Nissan alliance is proposing to acquire around 20 percent of Chrysler LLC and bring the Auburn Hills automaker into the French-Japanese automotive partnership, according to sources familiar with the situation.

The offer is now before private equity firm Cerberus Capital Management LP, which also is in talks with General Motors Corp. about its Chrysler holding.

Sources familiar with the discussions said Carlos Ghosn, CEO of both Renault SA and Nissan Motor Co., sent a proposal in recent days that included revisions to a draft agreement prepared by Cerberus.
The sources said Tokyo-based Nissan would acquire the stake because it has cash on hand, whereas Renault now has debts of more than $5 billion.

Nissan and Chrysler already have several joint projects in the works, with Nissan planning to produce small cars for Chrysler and Chrysler scheduled to make the next generation Titan full-size pickup for Nissan. Chrysler and Nissan managers say the teams work well together.

But another source close to the talks has told The Detroit News that Cerberus founder and CEO Stephen Feinberg favors a deal with GM, viewing it as the best solution for the embattled U.S. auto industry.

Under the scenarios being discussed with GM, the automaker might absorb its smaller rival or establish it as a subsidiary, with Cerberus expected to take a stake in the combined automotive entity. But these scenarios would require financing, which is hard to obtain in this economic environment.

"The key to any deal is the availability of financing to fund present cash burn rates and substantial merger costs," said Citi auto analyst Itay Michaeli.

He estimated that the combined entity would need at least $10 billion to $12 billion of fresh cash. "Attaining such financing could require Cerberus' participation and perhaps that of certain Chrysler bank debt holders," he said in a research note.

Citing "the significant execution risk and a checkered industry mergers and acquisition track record," he reiterated his sell rating on GM's stock.

Most industry experts say such a GM-Chrysler deal would lead to drastic job cuts at Chrysler because of the huge overlap between the two U.S. automakers' businesses.

Brands would be retained
By contrast, Detroit's smallest automaker would remain largely intact as a partner in the Renault-Nissan alliance.

It would participate in the joint purchasing, vehicle platform development and other programs, slashing its costs. But it would have its own management and retain its brands. There is little overlap among Renault, Nissan and Chrysler brands in most of the world.

The Renault-Nissan alliance was formed in 1999, when France's Renault SA acquired a controlling stake in then-struggling Nissan. Ghosn, then a senior executive at Renault, was dispatched to Japan, where he returned Nissan to profitability within a year.

He has expressed a wish for a long time to add a North American partner to the alliance.

But with the world's markets and economies struggling through a steep and potentially protracted downturn, many Renault and Nissan investors may resist Ghosn's plan to add a third, and troubled, member to the alliance. With sales tumbling in the United States and Europe, Renault and Nissan are straining, although they are still profitable.

Nissan had around $2.4 billion of net cash at the end of June but is committed to paying around $1.5 billion in dividends. Its investors were unhappy two years ago, when Renault-Nissan envisaged a three-way deal with GM.

Sources close to the talks say it is far from certain that Cerberus will conclude a deal with either Renault-Nissan or GM.

Cerberus, Renault and Nissan declined to comment. But the sources close to the talks say that GM and Cerberus are targeting a deal before the presidential election Nov. 4, when politicians may be more receptive to requests for federal aid to complete a merger.

Industry experts speculated on the dynamics of the parallel negotiations. "I don't know if Cerberus is playing GM off against Nissan-Renault," said Sean McAlinden, chief economist and vice president for research at the Center for Automotive Research in Ann Arbor.

Cerberus acquired 80.1 percent of Chrysler from then-DaimlerChrysler AG in August 2007 for $7.4 billion, most of which was injected into Chrysler. Cerberus is now in talks to acquire Daimler's remaining 19.9 percent stake.

Whether it concludes a deal with GM or Renault-Nissan, the New York-based private equity firm is unlikely to get money for Chrysler, analysts say, noting that Daimler essentially gave away the U.S. automaker that it had acquired in 1998.

Sales have fallen 25%
Now privately owned, Chrysler does not publish its financial results. But the automaker has suffered the sharpest sales drop of any major player in the U.S. market. Its sales have fallen 25 percent so far this year, twice the rate of the overall market's decline.

Its talks with Nissan expanded beyond vehicle projects in February, when Nissan, Chrysler and Cerberus officials met in Japan to discuss the possibility of a deeper relationship. Cerberus executives have led the negotiations with Renault-Nissan since the late spring.

The sources familiar with the negotiations say Nissan would likely acquire a stake of at least 15 percent -- allowing it to account for the holding as an equity investment under Japanese rules -- and most likely around 20 percent.

Nissan Executive Vice President Carlos Tavares is leading the negotiations, according to the sources, with help from senior U.S.-based Nissan executives.

The cost-saving estimates have been described as encouraging, though not on the scale of the benefits that would have been generated by the Renault-Nissan-GM deal proposed in 2006 by former GM shareholder Kirk Kerkorian. GM and its board rejected the proposal.

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