Chrysler bet poses dilemma: double-down or fold?
DETROIT (Reuters) - A year ago, Cerberus Capital Management LP took Detroit by storm, snapping up automaker Chrysler LLC in a $7.4 billion deal the buyout firm said was intended to rescue a struggling American icon.
Now the more pressing question may be how to rescue that bet for Cerberus investors.
Surging oil prices and a slump in sales have exposed the weakness of Chrysler's position and its reliance on trucks and SUVs and the U.S. market, raising more urgent questions about the end game for the automaker under private ownership.
By some measures, Chrysler faces even deeper problems than its larger rivals Ford Motor Co (F.N) and General Motors Co (GM.N), which have been able to use overseas earnings to cushion the blow from the downturn in U.S. sales that has hit the industry this year.
Chrysler's U.S. sales are down 19 percent so far this year -- the largest drop for any of the major automakers. Its three brands are down in closely watched quality ratings, and its product launches for the remainder of the year hearken back to a time when gas was cheap and buyers clamored for more horsepower.
Chrysler's decision to raise prices for 2009 vehicles underscores the growing pressure on an automaker. Usually automakers cut prices and add incentives in the face of softening demand.
The most likely scenario in the near term, analysts said, would be for Cerberus to seek a partner for Chrysler or sell off a brand for a cash infusion and try to ride out the downturn.
"They cannot survive without a partner in my opinion," said Thomas Stallkamp, a former Chrysler president and now a partner with Ripplewood Holdings. "They need a partner for distribution internationally. They need a partner for technology. They need a partner to help balance."
For its part, Cerberus says its investment is solid and it remains too early to judge Chrysler's performance.
Tim Price, a Cerberus managing director involved in the deal, said Chrysler was ahead of its cash flow forecast by $1 billion. Chrysler ended 2007 with $9 billion in cash.
"We are comfortable. We are long-term investors," he said. "We are under no pressure to sell anything in any specific time frame."
'CAUGHT FLAT-FOOTED'
But Chrysler, which had to rely on a U.S. government bailout back in 1980, has struggled with a product line-up that relies heavily on gas-hungry SUVs and trucks at a time when U.S. consumers are flocking to more fuel-efficient cars.
Across its Dodge, Jeep and Chrysler brands, the automaker offers 15 light-truck models, accounting for 70 percent of overall sales.
Two Honda models -- the Accord and Civic -- outsell all of Chrysler's car models combined. In May, Honda Motor Co (7267.T) outsold Chrysler for the first time. Continued...
