EoW September 2007

Transat lant ic Cable

of the state of health of the American economy. A reading above 50 indicates growth; below 50, contraction. Economists said the higher production at factories augured a stronger economy for the rest of the year, partially offsetting a nationwide slump in homebuilding. To meet demand, American manufacturers are rebuilding their inventories after having reduced them over the previous months. “The manufacturing cycle continues to swing higher,” Dean Maki, chief US economist at Barclays Capital Inc (New York) told Bloomberg News . “This is a sustained improvement that we expect will continue into the second half. It will be a source of strength for over-all economic growth.” The faster pace of expansion in the nation’s factories and utilities indicated that consumer spending was boosting the confidence of US manufacturers even as prices for raw materials continued to climb, although at a more moderate pace. In the week before the ISM report, the Commerce Department said American consumers spent more freely in May as their incomes rose, a sign that high gasoline prices had not dampened the urge to buy. Brisk spending on big government projects, and by private builders on commercial construction, compensated for weakness in the housing sector. Construction spending rose only 0.9%, but even this gain was the biggest in nearly 18 months. The ISM report was one of several indicating that the US economy had begun its recovery from a first-quarter slump generally attributed to belt-tightening by businesses concerned about weakness in the housing and automotive industries. From January to March the economy grew at its slowest pace in more than four years. The good news was, of course, tempered by concern about inflation, which could curtail spending by American consumers and reduce their contribution to growth in the global economy. But a government report on income and spending, notably the ‘core prices’ paid by US producers for raw materials, indicated that manufacturing costs were under control at midyear. Some regional reports were similarly encouraging. ISM said that its Chicago-area measure of business activity had held near a two-year high in June. The Federal Bank of New York said factories in New York State expanded in June at the fastest rate in a year, while the Federal Bank of Philadelphia said that manufacturing in that area had accelerated at the fastest pace in more than two years. ❈

DaimlerChrysler agreed in May to sell 80.1% of its stake in the ailing Chrysler unit to the private equity investment firm Cerberus Capital Management for $7.4 billion, freeing Daimler to concentrate on its luxury Mercedes brand and its truck business. Mr Zetsche noted in June that the risk of ‘unwanted’ outside influence on Daimler had significantly diminished, and that its market value had already doubled. The company, its single- minded CEO asserted, is therefore ‘no longer a sausage that would be worth snatching at for financial investors.’ Either ‘Doctor Z’ had forgotten his relief on learning that financial investors had snatched at Daimler’s US sausage; or, more likely, he prefers not to think about that aspect of the most expensive merger in automotive industry history, and one of the least successful. If so, his financial department can be counted on to remind him of the high price of his deliverance from the Chrysler unit for which Daimler paid $37 billion nine years before. Chris Isidore, senior writer for CNNMoney.com , noted at the time of the sale to Cerberus that the German auto maker will not even get most of the money that is paid for Chrysler. Instead, Cerberus will contribute $5 billion to the auto operations it will now control, with just over another $1 billion going to Chrysler’s finance arm. (‘Daimler Pays to Dump Chrysler,’ 14 th May) Mr Isidore wrote: “While Daimler will receive the remaining $1.4 billion of the Cerberus capital contribution to the sale, Daimler expects to have to cover another $1.6 billion in Chrysler losses before the deal closes. So Daimler estimates that it will end up paying out about $650 million to close the deal, and that its earnings for 2007 will take a $4 billion to $5.4 billion profit hit due to charges related to the transaction.” Does Daimler come away with anything, besides its roughly 20% stake in the newly independent and debt-free auto maker Chrysler Holding? It does, indeed. Whatever lies ahead for Daimler under Mr Zetsche, it is closing the door on ongoing losses and liability for future health care costs for Chrysler’s unionised employees and retirees – estimated as high as $18 billion. Mr Isidore pointed out that Cerberus’s purchase of the Chrysler stake is not its first entry into the troubled US auto industry. Last year it bought a 51% stake in GMAC, the finance unit of General Motors; and it is in negotiations to become a major investor in Delphi, the world’s No 1 auto parts maker, which has been in bankruptcy since October 2005. “We are aware that Chrysler faces significant challenges, but we are confident that they can and will be overcome,” said John Snow, the chairman of Cerberus, who was US Treasury Secretary from 2003 to 2006. “A private investment firm like Cerberus will provide management with the opportunity to focus on their long-term plans rather than the pressures of short-term earnings expectations.” That is one view of the private equity sector which has become a major force in the acquisition of publicly owned companies in the US, often buying troubled operations at a bargain price and turning them around for quick resale at a profit. Cerberus did not disclose any long-term plans for Chrysler, should it return to profitability. ❈ ❈ ❈

Automotive

Daimler sheds Chrysler in a very expensive divorce

Dieter Zetsche, chief executive of DaimlerChrysler AG, seemed to enjoy his star turn as ‘Doctor Z’ in a series of droll TV commercials for Chrysler products which aired in the US and Canada last year. But an interview with Mr Zetsche published 25 th June in the German daily Tagesspiegel suggests he is happy to be laying down his American burden to focus entirely on the newly unbound and all-German Daimler AG.

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EuroWire – September 2007