ANALYSIS-UPDATE 1-Cerberus loses bet on Chrysler

* Fund long said would forgo profits on Chrysler auto
* Exposure to auto and financial estimated up to $1.7 bln
* Observers say a blow but just one part of portfolio

(Adds quotes from professor in paragraphs 22-23)
By Megan Davies
NEW YORK, April 30 (Reuters) - When Cerberus Capital
Management struck a $7.4 billion deal to buy Chrysler in May
2007, it made a big, risky bet that it could succeed in turning
around an American icon.
It declared that the carmaker would benefit from life out
of the spotlight, without the pressure of quarterly reporting.
"Our capital is patience," Cerberus Chairman John Snow said
on striking the deal.
But the failure of the No. 3 U.S. automaker could not have
been a more public black eye for the private equity firm that
has struggled for the past two years to make the investment
work.
"This is what happens when you make an investment in a
highly cyclical business at the peak of a cycle," said Steven
Kaplan, a professor of finance specializing in private equity
at the University of Chicago. "It's very risky and often ends
badly and this one did."
Cerberus has never disclosed what its exposure to Chrysler
is, but it is far less than the deal value because the company
bought it along with a number of co-investors.
None of Cerberus' investments make up more than 5 percent
of its total assets, a source familiar with the matter said.
That makes its exposure to Chrysler and Chrysler's
financing arm as much as $1.7 billion, and it is possible that
Cerberus makes some return on its investment in Chrysler
Financial.
The calculation is based on Cerberus having $23.5 billion
of assets when the deal was struck and takes into account a
$500 million second lien term loan from Cerberus in 2008.
"Clearly Cerberus, I'm sure, is not happy they made this
investment," said Kaplan.

HIGH STAKES BET
Private equity firms that went on a spending spree during
the 2005-7 boom have been regretting a number of those deals,
as one portfolio company after another slips into bankruptcy.
None, however, have been so high profile a bet as Chrysler,
the Detroit automaker that has churned out vaunted brands such
as Chrysler, Jeep and Dodge brands.
Chrysler's public failure is a blow to a company that has
tried to keep out of the spotlight.
Cerberus, co-founded by secretive Stephen Feinberg and
named after the multiheaded dog that guards the gates of the
underworld, avoids publicity.
It has been Snow, a former treasury secretary in the Bush
administration, rather than Feinberg, who has been the public
face of the Chrysler deal.
The deal looked at the time as though it could be a bargain
-- a fraction of the $36 billion deal that created the
transatlantic DaimlerChrysler nine years previous.
Putting a major U.S. automaker in the hands of a private
equity group for the first time, it saw Cerberus, along with a
consortium of co-investors, buy an 80.1 percent stake in
Chrysler and the auto company's financing arm Chrysler
Financial for $7.4 billion.
That was made up of $5 billion to invest in improving the
automotive group, $1.05 billion into its financing unit and
paying $1.35 billion to the seller, DaimlerChrysler. Cerberus a
year previous had bought a stake in General Motors Corp
financing arm GMAC.
But it became evident the battle to keep Chrysler above
water was being lost. In 2008, Chrysler had an $8 billion loss,
and U.S. sales fell 30 percent to 1.45 million vehicles.
"If the economy had turned around they might have had a
chance to unload it," said Mirko Mikelic, portfolio manager at
Fifth Third Bank. "But I think just the tremendous decline in
sales was probably not in their spreadsheets."
Mirko said Cerberus bought the business too early and were
too optimistic in their strategy for exiting the company.
Josh Lerner, a professor specializing in private equity at
Harvard Business School, said Cerberus didn't anticipate the
severe difficulties Chrysler encountered.
"In some sense it seems clear that with or without Cerberus
having shown up, Chrysler would have been a troubled company,"
Lerner said. "It may be that they did everything right, but the
storm was so ferocious that it sunk the ship in any case."

NOT JUST CHRYSLER
For a long time, Cerberus had been prepared for a loss on
the equity side of the Chrysler investment. It said last year
it would agree to forgo any profits that could be earned
relative to Chrysler as a result of any financing the
government may choose to provide. It also agreed to convert
debt to equity.
While the hit is a big one, Cerberus could still make money
on Chrysler Financial. It has also had less well-known
successes, such as its $3.1 billion sale of biopharmaceutical
firm Talecris to Australia's CSL Ltd .
"This is only one part of their portfolio and in any
private equity portfolio you're going to hit some misses," said
Mikelic. "This was a very public miss -- but it stings none the
less."
(Reporting by Megan Davies; Editing by Richard Chang)
((megan.davies@thomsonreuters.com ; +1 646 223 6112; Reuters
Messaging: megan.davies.thomsonreuters.com@reuters.net))
((For more M&A news and our DealZone blog, go to
http://www.reuters.com/deals))

Keywords: CHRYSLER CERBERUS

Keywords: CHRYSLER CERBERUS

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