Sale of Chrysler Tied to Cost of Retiree Health Care Benefits, Pensions

DaimlerChrysler on Monday announced an agreement to sell 80% of the Chrysler Group to private equity firm Cerberus Capital Management, a move that will allow DaimlerChrysler to eliminate health care and pension liabilities for Chrysler employees and retirees, the Washington Post reports.

Under the agreement, Cerberus will pay DaimlerChrysler $1.35 billion and contribute $6.05 billion to Chrysler (Freeman/Russakoff, Washington Post, 5/15). Chrysler, which will become Chrysler Holding, will assume all of the estimated $19 billion in health care and pension liabilities for employees and retirees represented by the United Auto Workers (Vlasic, Detroit News, 5/15).

UAW President Ron Gettelfinger said that the agreement was "in the best interest of our membership" (AP/New York Times, 5/15). Gettelfinger previously opposed the sale of Chrysler.

According to Gettelfinger, DaimlerChrysler CEO Dieter Zetsche and Chrysler CEO Tom LaSorda on Saturday told him that "the status quo for the Chrysler Group was no longer an option" (Chon et al., Wall Street Journal, 5/15).

Cerberus likely will ask UAW to renegotiate health and pension benefits for Chrysler employees when their current contract expires in September, or possibly earlier (Washington Post, 5/15).

Cerberus Chair John Snow, a former secretary of the Department of the Treasury, said he plans to address the issue in the next few months (Detroit News, 5/15).

Himanshu Patel, an analyst for JPMorgan Securities, said that the decision by Cerberus to acquire Chrysler "with its current pension/health care liabilities but without an apparent new labor contract in place" is "a positive sign for the Big Three's labor restructuring efforts" (Healey et al., USA Today, 5/15).

Brian Johnson, an analyst for Lehman Brothers, said, "Cerberus brings a fresh perspective and likely a stronger backbone to union negotiations."

Jonathan Steinmetz, an analyst for Morgan Stanley, added that the sale of Chrysler makes UAW more likely to agree to concessions on health benefits (AP/New York Times, 5/15).

Chrysler, GM and Ford have begun to discuss a plan similar to an agreement between Goodyear Tire & Rubber and the United Steelworkers of America to reduce their liabilities, according to three individuals familiar with the situation. The three automakers have a combined $95 billion in current and future health care liabilities.

Under the agreement, Goodyear transferred $1.2 billion in current and future health care liabilities to a trust fund managed by the union. In exchange, Goodyear established a $1 billion fund to pay medical costs and agreed to invest at least $550 million in manufacturing facilities represented by the union.

The agreement eliminated "uncertainty over whether health care costs would rise faster than projected, along with the possibility of a future face-off with the union over benefits" offered by Goodyear, the Journal reports.

One individual familiar with the situation of the automakers said that the "highest levels" of the companies have begun to discuss "doing something like the Goodyear deal."

JPMorgan Chase has estimated that the establishment of a similar trust fund managed by UAW cost the automakers between $55 billion and $65 billion (Wall Street Journal, 5/15).

Several broadcast programs reported on the agreement. Summaries appear below.

• American Public Media's "Marketplace Morning Report": The program included a discussion with John Reed, a car industry correspondent for the Financial Times (Thomas, "Marketplace Morning Report," American Public Media, 5/14). Audio and a transcript of the segment are available online.
• CBS' "Evening News": The segment includes comments from Zetsche; Snow; Peter Morici, an economist at the University of Maryland; Lee Iacocca, former chair of Chrysler; and Chrysler employees (Mason, "Evening News," CBS, 5/14). Video of the segment is available online. "Evening News" also reported on the effect of the agreement on negotiations with UAW on health and pension benefits. The segment includes comments from John McElroy, an auto industry analyst, and Sen. Debbie Stabenow (D-Mich.) (Cordes, "Evening News," CBS, 5/14). Video of the segment is available online.
• NPR's "All Things Considered": The segment includes a discussion with NPR correspondent Frank Langfitt and comments from Gettelfinger (Norris, "All Things Considered," NPR, 5/14). Audio of the segment is available online.
• PBS' "NewsHour with Jim Lehrer": The segment includes comments from Jurgen Schrempp, chair of Daimler-Benz; Robert Eaton, chair of Chrysler; Zetsche; Snow; and Gettelfinger (Warner [1], "NewsHour with Jim Lehrer," PBS, 5/14). The program also included a discussion with Andrew Ross Sorkin, a reporter who covers mergers and acquisitions for the New York Times, and Csaba Csere, editor in chief of Car and Driver magazine (Warner [2], "NewsHour with Jim Lehrer," PBS, 5/14). Audio and a transcript of the segments are available online.