Kirk Kerkorian has gone public with a low-ball, $4.5 billion bid for Chrysler. He knows the company well: he had a 10% stake in 1995, when he tried to buy it for $20 billion, and held onto that stake until Chrysler was eventually sold to Daimler for $36 billion. So he’s already made $3 billion from Chrysler, and now he’s coming back for more.
But why would DaimlerChrysler accept such a low bid, when all the chatter values Chrysler at closer to $8 billion? Kerkorian tugs at the heartstrings in his letter. He tries to paint himself as the “right” ownership, which will “build Chrysler into a robust and lasting, stand-alone entity,” and who will make “the necessary investments” in R&D and manufacturing.
All of which might be true. But DaimlerChrysler CEO Dieter Zetsche‘s foremost obligation is to his shareholders, and he is going to have a devil of a time explaining why it’s leaving billions of dollars on the table just because Kirk Kerkorian is a nice guy.
Shareholders just want to be shot of Chrysler. Before the Feb announcement they were valuing it at zero – in fact, it was dragging down the value of the rest of the company. Just the mere thought of getting it off the books has sent the stock soaring.
And that $8bn figure is baloney:
1) The car business might be worth $10bn in 2009 IF it can hit the 2.5% profit margins Daimler is hoping for. That’s a big if.
2) Perhaps the Chrysler part of the financial services business is worth $7bn. Perhaps. No one really knows for sure ‘cos Daimler won’t break out the numbers. An analyst at France’s Oddo Securities thinks Chrysler accounts for about 55% of assets (hence the $7bn). But there’s no reason to assume the Germans would sell all the loans on the books. No need. Assume sale proceeds of $3.5bn just for the sake of it.
3) Sadly, Chrysler also accounts for the vast majority, say 90%, of Daimler’s euro14.1bn of unfunded healthcare liabilities. In other words, $17bn.
4) To get to profitability in 2009, Daimler’s already talking about investing $5bn.
So we’ve got a potential business value of $13.5bn, but liabilities of $22bn.
In other words, Daimler starts off having to pay $8.5bn to get shot of Chrysler.
On that basis, taking some cash from a man who is not only promising to squeeze the unions for concessions but also might even keep some of the remaining liabilities (good tax breaks, see) really isn’t a bad starting offer.
But it is just a starting offer – there are four other potential bidders out there, after all.
I continue to be puzzled that the UAW hasn’t simply told what’s left of the Big 3 that they, the union, long have owned them, the companies.
Maybe they’re shy about asserting their rights, but as management generally long has been fond of reiterating — a contract is a contract.