Cerebus Buys Chrysler on the Cheap

Private equity firm Cerebus Corp submitted the winning bid for Chrysler Group. For $7.4 billion Cerebus gets 80% of the automaker. This compares to $36 billion Daimler spent in 1998 for the company. Chrysler lost $1.5 billion in 2006.

So what does Cerebus expect given its investment of $5 billion into the manufacturing arm and over $1 billion into its financing division? Chairman John Snow, ex Bush Secretary of the Treasury, said:

"Cerberus believes in the inherent strength of U.S. manufacturing and of the U.S. auto industry. Most importantly, we believe in Chrysler."

"We are aware that Chrysler faces significant challenges, but we are confident that they can and will be overcome."

At a press conference, Snow said the management team of Chrysler will benefit from not being in the public glare of quarterly reporting. "Our capital is patience," he said.

Actually their capital also involves high level political connections. Ex. Vice President Dan Quayle serves as an advisor to Cerebus.

Here's my guess as to the future. As a smaller self contained company, Chrysler will lobby Congress for the same preferential pension status as airlines and defense contractors. They will work to shed responsibility for health care costs by passing them onto the employee or the United Auto Workers union.

Several industry experts expressed surprise for UAW support for the deal with a private equity firm. They apparently are unaware of the Democrats setting up unions as the group purchaser for employee health insurance once employers jettison responsibility for the deal.

With pension and health care benefits slashed, Chrysler could quickly become profitable, Cerebus could sell their stake and make what all private equity firms envy, bundles of billions. I'm not sure an asset has been sold this cheap since John Snow sold CSX Lines to the Carlyle Group in 2003. Let the money changing commence...