UPDATE 2-Cerberus wants stake in any merged Chrysler-source

Mon Oct 13, 2008 8:28pm EDT

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By Jessica Hall

PHILADELPHIA Oct 13 (Reuters) - Cerberus Capital Management, which owns 80 percent of Chrysler, has no plans to divest its stake in Chrysler and aims to own an interest in any combined company that may result from a merger with the U.S. automaker, a source familiar with Cerberus' thinking said on Monday.

Cerberus had held talks about potentially combining Chrysler with General Motors Corp (GM.N), but never discussed divesting its entire Chrysler stake or swapping Chrysler in exchange for an increased stake in auto-financing business GMAC, the source said.

"Cerberus is not dumping Chrysler or simply swapping it for an increased share in GMAC. That deal was not discussed and they have no interest in it," said the source, who declined to be identified because the source was not authorized to speak with the media.

"In any business combination with GM or anyone else, Cerberus would look to come out on the other side owning a meaningful stake in the combined auto company," the source said.

Cerberus has no plans to exit the auto industry, despite a 25 percent drop in Chrysler's sales this year, the source said.

"For the right deal, Cerberus would invest more money," the source said. "This is a long-term investment with a lot of upside."

Cerberus bought an 80 percent stake in the automaker in August 2007 from Daimler AG (DAIGn.DE), but the U.S. auto market has seen demand plunge since then because of a combination of high gasoline prices, tight credit and a weak housing market.

"Cerberus executives have maintained repeatedly that they believe in the industry. They expect to be there for the long term and want to do all they can to position Chrysler for the future," the source said.

Chrysler, whose sales have fallen 25 percent this year, has faced scrutiny over whether it can ride out a steep downturn in U.S. auto sales that many analysts expect to stretch through 2009.

Chrysler Chief Executive Bob Nardelli said on Monday the automaker is talking with "third parties," but declined to comment specifically on whether the firm held talks with GM.

Cerberus has talked with several companies, including Ford Motor Co (F.N), Renault-Nissan (RENA.PA) (7201.T), Italy's Fiat FIA.MI, India's Tata Motors Ltd (TAMO.BO) and Canada's Magna International MGa.TO, other sources previously told Reuters.

"Industry members are exploring every combination you can think of. In the ones that make sense, the synergies are huge, and much of it gets realized immediately," the source familiar with Cerberus said.

Daimler has said it is in talks to sell its 20 percent stake in Chrysler to Cerberus. Owning all of Chrysler would make any merger negotiations simpler for Cerberus to pursue, the source said.

The timing of a resolution with Daimler or any full merger for Chrysler was not immediately clear.

Cerberus, named for the mythological three-headed dog that guarded the gates of the underworld, declined to comment.

The firm, which has about $26 billion under management, has gotten much media attention for its investments in Chrysler and GMAC at a time when the U.S. auto and housing industries have been hit by the credit crisis.

"While we have received a lot of press about certain companies and their problems, not only will these companies not have a significant effect on our performance, but they all, in our view, are conservatively valued, and some may have real upside from the mark," Cerberus head Stephen Feinberg said in a recent letter to investors.

"The Fund remains well diversified such that no one, two or three positions will determine our returns," Feinberg said. "None of our problem positions are large enough to create a real return problem for the Fund." (Reporting by Jessica Hall; Editing by Susan Kelly, Gary Hill) (For more M&A news and our DealZone blog, go to here)