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Cerberus: Tiny gains OK-Letter to investors says cheap Chrysler deal will pay off

From the Detroit Free Press:

Cerberus: Tiny gains OK
Letter to investors says cheap Chrysler deal will pay off
February 16, 2008
By JUSTIN HYDE
FREE PRESS WASHINGTON STAFF

The founders of Cerberus Capital Management, the private equity fund that owns 80.1% of Chrysler LLC, told investors last month that although they have "high hopes" of transforming the company, the deal was cheap enough that even modest improvements will pay off.

The comments by Stephen Feinberg and Bill Richter, in a nine-page letter to investors, lay out the firm's worries about a weakening U.S. economy and paralyzed debt markets, especially for investments in GMAC and Chrysler Financial. While they say Chrysler faces significant risks in a severe auto industry slump, they defend the company's current finances and call their stake a low-risk proposition.

"We believe we bought the company very cheaply, and we do not need to be heroes to earn a good return on the investment," Feinberg and Richter said in the letter, obtained by Bloomberg News and the Wall Street Journal, which posted a copy on its Web site this week. "We do not need to transition the car industry or even to return Chrysler to a much stronger relative position in the U.S. car market in order to be successful.

"Even though we have higher hopes of deeply and fundamentally improving Chrysler, solid blocking and tackling and reasonable execution should be enough to earn a good return."

Feinberg, the secretive force behind Cerberus, offered a more emotional view of Cerberus' stake in Chrysler at the time of the deal last year, telling union workers he hoped to restore an American icon. While the deal was valued at $7.4 billion, the transaction essentially involved Daimler paying Cerberus a small fee to take Chrysler off its hands.

In the letter, Feinberg and Richter praised the troika of top Chrysler executives -- CEO Bob Nardelli and Cochairmen Jim Press and Tom LaSorda -- as "in some respects almost a dream team." They criticized recent stories about Chrysler's finances, saying the company has more than $8 billion in cash "and so far it is beating our initial earnings estimates despite a soft car market."

Chrysler spokesman David Barnas said Friday that the automaker is building for long-term success. "Despite the challenges that lie ahead, Chrysler is confident today that the company is poised on the threshold of full recovery," he said.

In November, Chrysler announced plans to eliminate as many as 10,000 hourly jobs on top of plans announced in February 2007 to cut 11,000 hourly jobs over three years. Feinberg and Richter say Chrysler can survive a typical economic downturn but would be pressured if the economy weakens much further, or if the debt market that Chrysler Finance relies on to raise cash for car loans declines further.

"It is in the case of an extraordinary automotive collapse or an unusually deep recession that we worry," the pair said.
But they also said that Cerberus' funds are diversified enough that if two or three deals fail, "our people will feel awful and will find it unacceptable, but it will not hurt the funds terribly." Feinberg and Richter even offered some insight into their view of the spotlight from the Chrysler and GMAC deals, saying they "despise all the public attention we are getting."

"What matters is how we really perform for our investors," they said. "The rest is nonsense."

Cerberus said the automaker is on track with its recovery.
In a statement Friday, a spokesman said: "Our business model is based on seeing value where others don't and creating value when others can't. We continue to be extremely enthusiastic about our investment in Chrysler."
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