Key Banc says Magna weighing Chrysler bid

(Adds no comment from Magna)

DETROIT, Feb 26 (Reuters) - Canadian auto parts supplier Magna International Inc. (MGa.TO) has been "seriously considering the potential purchase" of Chrysler Group, an analyst for KeyBanc Capital Markets said, citing unnamed sources.

In a note for clients issued on Monday, KeyBanc analyst Brett Hoselton said that he did not believe the two companies would ultimately merge despite the "substantial due diligence work on Chrysler" by Magna.

"We believe the merger strategy is risky and will confront resistance from numerous (Magna) and Chrysler stakeholders and that the ultimate combination of the two companies is a low-probability outcome," Hoselton said.

Magna declined comment. "Anything to do with the Chrysler rumors we are not commenting on." said Tracy Fuerst, a Magna spokeswoman. "It is speculation at this point and we are just not commenting on it."

DaimlerChrysler AG DCXGn.DE said earlier this month that it was keeping all options open for its struggling North America unit and has been working with investment bank J.P. Morgan Chase & Co. to prepare a detailed sales prospectus.

Daimler representatives have declined to comment on potential bidders. Sources have told Reuters that General Motors Corp.GM.N has been talking to Chrysler about an outright purchase or an alliance. Other potential bidders include private equity firms, people familiar with the transaction have said.

Hoselton said he was maintaining a "hold" rating on Magna stock, but said there was a risk that shares in the auto supplier could fall "to the extent that investors believe that a merger could be consummated."

He said sources had told him that Magna's initial assessment of a Chrysler purchase had included a meeting with leadership of the United Auto Workers union, a visit to all of Chrysler's facilities and access to the struggling automaker's financial data.

"We believe that (Magna) management has come to believe that it has reached a plateau as a supplier and niche contract assembler and that increased involvement in the design, research and development of vehicles is the natural progression of its current capabilities," Hoselton said. "We also believe Magna views Chrysler as its opportunity to become the low-cost provider of virtually everything in the automotive supply chain," he said.

Chrysler lost $1.48 billion last year and is cutting 13,000 jobs and closing an assembly plant in Delaware as part of a plan to return to profitability by 2008.

(Additional reporting by Frank Pingue in Toronto)

((Reporting by Kevin Krolicki, editing by Dave Zimmerman; Reuters Messaging: kevin.krolicki@reuters.com@reuters.net; 1-313-967-1902))

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