11-28-2006, 04:41 PM
Join Date: Mar 2001
Disgruntled investors seek Chrysler spin-off
Disgruntled investors seek Chrysler spin-off
STUTTGART/FRANKFURT, Nov 28 (Reuters) - Growing ranks of shareholders in DaimlerChrysler are calling for a spin-off of loss-making U.S. arm Chrysler, which they say is dragging down the group and damaging management's credibility.
But that pits them directly against Chief Executive Dieter Zetsche and his executive team, who remain determined to hang on to Chrysler and restore it to profit.
"I would welcome a separation of Daimler from Chrysler," said Ingo Speich, portfolio manager for car stocks at German fund manager Union Investment, which with nearly 14 million shares is among the biggest German investors in the group.
"Cooperation between Mercedes-Benz and Chrysler is still very limited," he said, undermining a key argument for the 1998 merger with Daimler-Benz that formed the world's fifth-biggest carmaker.
Chrysler remains for investors "the great unknown", he said, a "problem child" that could shred the group's future results even if management makes no mistakes.
Stung by U.S. consumers' shunning of high-margin light trucks and sport utility vehicles given high fuel prices, Chrysler will lose around 1 billion euros ($1.3 billion) in 2006 as it scrambles to roll out more fuel-efficient vehicles.
That has prompted a drive to cut costs by $1,000 per vehicle, but investors says more radical surgery may be needed.
"I think a demerger is very realistic," said Juergen Meyer, fund manager at Sweden's SEB Asset Management, which owns around 1.2 million DaimlerChrysler shares, down from 1.7 million early this year.
"I don't see the synergies that DaimlerChrysler has been pursuing for years. Customers' desires simply do not fit together," he said.
JP Morgan also saw momentum rising for a major change.
"We remain convinced that management patience towards under-performing assets like Chrysler has worn thin and increases the likelihood that DaimlerChrysler will reduce exposure to Chrysler," the bank said in a recent note.
RATINGS IN FOCUS
A spokesman for DaimlerChrysler said: "We are in the process of working out a comprehensive programme to make Chrysler Group profitable for the long term. Everything else is speculation to which everything has already been said."
Getting rid of Chrysler could also help the group cut its borrowing costs, depending on how such a deal was structured.
"We would certainly have to consider a different rating for DaimlerChrysler if Chrysler were no longer in the group," said Falk Frey, senior credit officer in Germany for Moody's Investors Service, which cut the group's debt rating to Baa1 from A3 in September after Chrysler triggered a profit warning.
Chrysler is the reason Moody's downgraded the long-term rating and said it may do so again, Frey told reporters
After a muddled message on its commitment to Chrysler during the third-quarter results conference call, DaimlerChrysler was forced last month to reiterate that Chrysler was not for sale.
"No one would buy it," said one investment banker who follows the auto sector closely, "but perhaps the Chinese would take it if they didn't have to pay anything for it."
Many analysts put Chrysler's worth at zero or less when valuing the group on a sum-of-the parts basis.
"Chrysler may be worth something going forward, but it may as well be a longer-term cash absorber," said Christian Breitsprecher at BHF Bank in a note to clients.
One German banker said linking Chrysler up with Renault or Volkswagen would offer Chrysler small-car expertise that it now lacks and is pursuing with two potential partners, one of which is China's Chery.
Stephen Cheetham, automotive analyst at Sanford Bernstein, said ditching Chrysler -- even for a nominal sum and with its liabilities fully funded -- could boost the group's stock value at least 10 percent by changing investor sentiment.
"However, we believe there are three issues inhibiting a near-term disposal deal: management will, finding a buyer, and uncertainty surrounding Chrysler's benefit liabilities," he told clients in a note.
The real stumbling block is approximately 2 billion euros in unfunded pensions and 16 billion euros in unfunded retiree healthcare liabilities, he added, liabilities that any buyer would no doubt insist that DaimlerChrysler finance in full.
The unionised work force is taking a hard line on cost savings at Chrysler and will be loath to see it severed from rebounding earnings power at premium division Mercedes and the group's market-leading trucks division.
The other option is for a complete break-up of the group, but management has shown little appetite for such a move and its 45 billion euro market value makes it a difficult acquisition target, despite its large free float.