UPDATE 3-Cerberus in talks with Renault, GM-sources
* Deal could break up No. 3 U.S. carmaker Chrysler * GM may buy assets instead of full acquisition * Renault possibly interested in Jeep (Adds Renault denial)
By Kevin Krolicki and Jui Chakravorty Das
DETROIT/NEW YORK Oct 16 (Reuters) - Private equity firm Cerberus is in talks to sell all or part of Chrysler LLC's operations to Renault SA (RENA.PA) and General Motors Corp (GM.N) as it considers a range of deals that could break up the No. 3 U.S. automaker, people familiar with the talks said on Thursday. A Renault spokeswoman denied the talks.
Cerberus Capital Management [CBS.UL], Chrysler's majority owner, is talking to GM about a transaction in which GM could buy some of Chrysler's assets as an alternative to an outright purchase of its smaller rival, the sources said.
Renault's interest in Chrysler range from an alliance to an acquisition of Jeep, widely considered to be Chrysler's most valuable brand, the sources said.
Any deal with Renault to buy Jeep would put the world's first and best-known sport-utility brand back in the hands of the French automaker that sold it to Chrysler along with American Motors in 1987.
Chrysler assets under consideration for purchase by GM include Chrysler's top-selling minivan line, a market segment Chrysler pioneered almost 25 years ago, and its truck-production facilities in Mexico, one of the sources said.
Cerberus' talks with GM also have included the possibility of Chrysler buying GM's remaining 49-percent share of GMAC. In one scenario, GM would swap its GMAC stake for Chrysler's auto operations, sources have said.
The contacts between Cerberus and the automakers remain wide-ranging and preliminary but have been given urgency by the sharp downturn in auto sales that has forced Chrysler, GM and Ford Motor Co (F.N) to take steps to cut costs and shore up their cash holdings. Chrysler, Cerberus and GM had no comment.
Other deals being considered by Cerberus hinge on whether Chrysler's key assets now have more value separately than together, people familiar with the discussions said.
As a result, Cerberus is looking at selling its Mopar parts unit, spinning off its engineering operations as a separate company and hiving off Chrysler Financial, one of the sources said.
That captive finance company also could be merged with GMAC, the GM affiliated lender in which Cerberus owns a controlling 51 percent stake, several sources said.
But all of the potential deals have been complicated and slowed by the volatility in financial markets and frozen credit markets, according to the people familiar with the talks.
Market turmoil has made it far more difficult for Cerberus and potential bidders to agree on the value of Chrysler's various parts or the value of GMAC, the sources said.
Cerberus bought an 80.1 percent stake in Chrysler from Daimler AG (DAIGn.DE) in 2007 for $7.4 billion, but the automaker, like its listed Detroit-based rivals, has been hit hard by a steep decline in U.S. auto sales to 15-year lows.
Separately, Cerberus is nearing a deal to buy Daimler's remaining stake in Chrysler, one of the sources said. Any deal Cerberus might make to sell or merge Chrysler with another automaker hinges on Cerberus buying out Daimler's interest. [nN16473940]
FROM THREE TO TWO?
Even so, several people familiar with the talks said it was possible that they would break off without any deal and that Cerberus would opt to keep Chrysler running on its own, a strategy it committed itself to when it bought the automaker last year and pledged to restore an American icon.
Chrysler Chief Executive Bob Nardelli said earlier this week that the automaker was talking to a range of potential partners, but also has stressed that the company has a plan to return to profitability on its own.
Still, other observers said the tone and tenor of the Chrysler talks underscored an urgency by Cerberus to back away from a high-profile and loss-making investment.
"Cerberus has significantly underestimated the difficulty of running an automotive business, whether a parts supplier, finance company or vehicle assembler," said a banker who declined to be identified.
The still-ongoing talks between GM and Chrysler have revived discussions about a potential merger that started in early 2007 before Chrysler was sold to Cerberus.
Analysts were unimpressed with the prospect of a full merger between Chrysler and GM as reports of those talks surfaced earlier this week. GM has been struggling for the past three years to cut costs and shed capacity.
The largest U.S. automaker burned through about $1 billion a month in the past quarter and has faced scrutiny from investors and creditors over whether it has the cash needed to ride out a downturn in global auto sales now expected to worsen in 2009.
"At this point, it is not obvious how (a merger) would possibly increase the liquidity of the companies, and that is what Chrysler and GM need to get through the downturn," Standard & Poor's analyst Robert Schulz said on Thursday.
David Brophy, director of the Center for Venture Capital and Private Equity at the University of Michigan, said private equity investors, like Cerberus, were being forced to get more creative in deal-making because of the pressure on credit markets.
"Right now it's like walking across the Grand Canyon on a tightrope and they've got to get across to the other side," Brophy said. "I think you'll see more of these deals that are outside the classic private equity model."
Former Renault chairman and chief executive Louis Schweitzer said in a memoir published last year that he regretted selling AMC and Jeep when the French automaker pulled out of the U.S. market in the late 1980s. Renault bought American Motors, which owned Jeep, in 1979.
"It would have been clever to make full use of Jeep," Schweitzer wrote. "If we had done so, we would have been in a good position today in the U.S." (Additional reporting by David Bailey in Detroit; editing by Carol Bishopric and David Cowell)
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