Cerberus close to sealing Chrysler deal: source

NEW YORK (Reuters) - Cerberus Capital Management appears close to striking a deal to buy Chrysler Group, a source familiar with the matter said, in an agreement that would place the No. 3. U.S. automaker in the hands of a private equity owner.

An announcement of the pact with DaimlerChrysler AG could come as early as Monday, the source said on Sunday, with several major newspapers also reporting that Cerberus was poised to win a majority stake in Chrysler.

Germany's DaimlerChrysler put its struggling U.S. auto unit up for sale in February after Chrysler posted a loss of nearly $1.5 billion for 2006 on dwindling sales of its mainstay light trucks.

The sale of Chrysler would unwind a failed nine-year-old merger between the American mass-market brands Jeep, Dodge and Chrysler and Germany's luxury Mercedes line at a time of wrenching restructuring for the U.S. auto industry.

Private equity firms have been active in recapitalizing the troubled auto parts sector but a deal for Chrysler would mark the first time a financial buyer has taken control of one of the major automakers.

Chrysler Chief Executive Tom LaSorda would continue to run the company while Chrysler's former chief operating officer and Cerberus adviser, Wolfgang Bernhard, would not have an executive role but could have a board seat, two newspapers reported on Sunday. Daimler would likely keep a minority stake in the company.

Cerberus and Chrysler declined to comment.

Details on the price or other terms of the offer were not clear on Sunday. A previous offer by billionaire Kirk Kerkorian of $4.5 billion in cash for Chrysler was rejected. The purchase price is expected to be well below the $36 billion the former Daimler-Benz AG paid for Chrysler Corp. in 1998.

Key to the offer is the company's $18 billion in pension and health-care liabilities related to Chrysler's contracts with its United Auto Workers-represented factory workers.

The bidders that publicly said they were vying for Chrysler are Kerkorian's Tracinda Corp. and Canadian autoparts maker Magna International. Private equity firm Blackstone Group also pursued Chrysler, and was said to be linked up with smaller buyout firm Centerbridge Partners.

Tracinda was frozen out of the bidding. The fate of the other offers remained unclear on Sunday.

New York-based Cerberus is a private investment fund that has built a huge private equity and hedge fund practice.

INDUSTRY EXPERIENCE

Key to its pursuit of Chrysler is the Cerberus's experience with the auto industry and its stake in GM's financing arm. General Motors Corp. sold a 51-percent stake in its financing arm, GMAC, to a consortium led by Cerberus in a deal worth about $14 billion last year.

Among the prized assets within Chrysler is its own auto-financing arm.

Private equity firms buy controlling stakes in companies, restructure the businesses, and typically sell them two to four years later. They borrow around two-thirds of the money to make their purchases.

Frothy debt markets and a steady economy have allowed these so-called buyout firms to go on an unprecedented buying spree.

Cerberus was among the firms that co-led the proposed $3.4-billion investment to support Delphi Corp. in the auto-parts maker's emergence from bankruptcy.

But Delphi said last month that it expected Cerberus to pull out of the plan. An exit from Delphi by Cerberus would underscore the difficulty in negotiating new labor contracts between the bankrupt supplier and the UAW.

The tension between Cerberus and the UAW could spill over into a deal with Chrysler, where the UAW represents some 50,000 workers. The union has said that it wants a corporate or "strategic" buyer for the company and not a private equity firm if the sale is not scrapped.

Chrysler, which is in the process of cutting 13,000 jobs, is targeting a return to profitability in 2008. A key hurdle, analysts have said, is the company's ability to clinch a new contract with the UAW that reduces costs, particularly for health care.

Chrysler's current four-year contract with the UAW expires in September.

DaimlerChrysler has fallen to No. 4 in the U.S. light vehicle market behind Toyota with a 15.4 percent market share this year. The company's sales for all brands are down 2.1 percent in 2007 through April.

(Additional reporting by Kevin Krolicki in Detroit)