Daimler, Cerberus spar over Chrysler

FRANKFURT/DETROIT (Reuters) - Private equity firm Cerberus is demanding more than $7 billion from Daimler AG over losses that followed its 2007 acquisition of Chrysler LLC in a bitter dispute that could overshadow a plea for U.S. government aid for Chrysler.

The extraordinary claim, dismissed as baseless by the German automaker, amounts to a demand for more than a full rebate for the amount Cerberus Capital Management paid in its troubled deal for Chrysler just over a year ago.

Cerberus claims that Chrysler's former owner Daimler breached the terms of a $7.2 billion deal to sell 80.1 percent of the struggling U.S. automaker in August 2007.

Daimler, which went public with the dispute on Wednesday, said that the demands by Cerberus had complicated talks over the sale of its remaining 19.9 percent of Chrysler.

"From our point of view, Cerberus has taken a position that is very difficult to comprehend," Daimler Chief Executive Dieter Zetsche told reporters in Munich, calling the allegations "unfounded."

Cerberus had been looking to acquire the remainder of Chrysler from Daimler in order to simplify a potential sale of Chrysler, people familiar with the talks have said.

Merger talks between Chrysler and General Motors Corp were dropped earlier this month when GM said its near-term focus was on shoring up its own cash position.

Cerberus is now seeking $7 billion in emergency federal aid for Chrysler and has been given until early next week to submit plans to the U.S. Congress on how the automaker can be restructured as a "viable" business.

That request is part of a plea for $25 billion for the U.S. auto industry also being pushed by GM and Ford Motor Co and scheduled to be taken up by U.S. lawmakers next week.

Chrysler Chief Executive Bob Nardelli said on Wednesday in an email to employees that the automaker was ready to meet the "viability" test set by Congress and share "plans for returning Chrysler to profitability.

Chrysler burned through $3 billion in the third quarter, leaving it with just $6.1 billion in cash as sales worsened.

Until now, Cerberus executives had said that the Chrysler investment performed according to their plans until the most recent industry-wide downturn in U.S. auto sales.

It was not clear to what extent Cerberus' accusation that Chrysler was a damaged asset when it acquired the automaker would affect the U.S. government's attitude toward a possible bailout now.

VEHICLE FINANCING PART OF DISPUTE

In a statement, Cerberus said Daimler had made "extraordinary changes" to its underwriting standards for vehicle leases and financing between February 2007 and when the deal to sell Chrysler closed in August.

The result of those changes would have been a boost to Chrysler, Jeep and Dodge vehicle sales but at the cost of shifting risk to the balance sheet of Chrysler and Chrysler Financial, its financing arm.

Chrysler sold about 1.26 million vehicles between February and August 2007. In 2008, under Cerberus, sales plunged 26 percent over the same seven-month period.

Cerberus also said Daimler had "intentionally and materially breached its obligations" under the Chrysler deal in other ways it did not specify. It signaled it could sue to press its claims.

"We are considering our strategic options and will have further comment after assessing the effects of Daimler's recent actions," the private equity firm said.

Daimler said the claims by Cerberus went beyond contractually agreed commitments. A spokesman for the German automaker said talks over a sale of its remaining stake in Chrysler will still go forward.

"In our view the negotiations with Cerberus have neither failed nor ended," he said, but made clear Daimler was not prepared to give away its remaining Chrysler stake.

"We had not expected that Cerberus would expect to get the stake for free," he said.

The dispute raises questions about the due diligence review of Chrysler before Cerberus bought its controlling stake in the struggling automaker. Cerberus has also been saddled with losses due to its 2006 acquisition of a 51 percent stake in auto and mortgage finance company GMAC.

Daimler shares briefly fell on news of the dispute over Chrysler before recovering to trade up 2.1 percent at 24.69 euros by 1912 GMT, lagging a 7.4 percent gain in the DJ Stoxx European car sector index.

Cerberus has sent Daimler a letter detailing its claims, a person with direct knowledge of the situation said.

Cerberus has not filed a lawsuit against Daimler but has demanded the German automaker pay out more than the $7.2 billion Cerberus paid for Chrysler, the person said.

Cerberus has been seeking a range of partners for Chrysler beyond the now-halted merger talks with GM.

In addition to GM, Cerberus has also had contact with Italy Fiat SpA, India's Tata Motors Ltd., China's SAIC Motor Group, and the Renault-Nissan alliance in a so-far unsuccessful bid to find a buyer for all or part of Chrysler, people familiar with the talks have said.

Earlier on Wednesday, in another sign of how the global sales slump is reshaping the auto industry, Toyota Motor Corp had its credit ratings cut for the first time in a decade, hitting its shares and raising borrowing costs.

Fitch Ratings downgraded Toyota's long-term foreign and local debt ratings on Wednesday to AA from AAA, with a negative outlook, saying the company needed to review its global investments, product mix and speed of expansion to address the challenges it faces.

General Motors shares were up $1.27 or 35.7 percent at $4.83 on the New York Stock Exchange on Wednesday afternoon, and Ford shares were up 44 cents or 26.5 percent at $2.10, after a Deutsche Bank analyst said chances have improved for the U.S. automakers to receive a government bailout.

(Additonal reporting by Hendrik Sackmann in Stuttgart, Irene Preisinger in Munich and Jui Chakravorty in New York; editing by Simon Jessop and Matthew Lewis)