DCR Views Credit Implications of Chrysler Merger Positively
7 May 1998
DCR Views Credit Implications of Chrysler Merger Positively
CHICAGO, May 7 -- Duff & Phelps Credit Rating Co. (DCR)
believes the proposed merger of Daimler-Benz and Chrysler Corporation
(Chrysler) has positive credit implications for both Chrysler and its finance
subsidiary, Chrysler Financial Corporation. DCR currently rates Chrysler's
senior long-term debt (including notes, debentures and Auburn Hill trust
certificates) at 'A' (Single-A), and its convertible preferred stock at 'A-'
(Single-A-Minus). DCR's ratings for Chrysler Financial Corp. are 'A'
(Single-A) for its long-term debt and 'D-1' (D-One) for its commercial paper.
Daimler-Benz and Chrysler announced today that they have agreed to merge
their businesses through an exchange of shares whereby shareholders of both
companies will become shareholders of a new company, to be called
DaimlerChrysler. The merger is valued at $92 billion. The new company will
be incorporated in Germany with operational headquarters in Stuttgart,
Germany, and Auburn Hills, Michigan. Based on 1997 results, the combined
company is the world's third-largest in terms of revenues and the
fifth-largest producer of cars and light trucks.
The merged company will combine the complementary strengths of
Daimler-Benz and Chrysler. There is little overlap in product lines or
geographic presence. Chrysler's particular strength has been in
sport-utility vehicles, minivans and pickup trucks while Daimler-Benz is a
leading producer of luxury cars. Taken together with Chrysler's lineup of
passenger cars, the new company will have a broad product portfolio with some
premier brands. The preponderance of Chrysler's automotive sales are in the
United States with only about a 1 percent share in Western Europe, while
Daimler-Benz has an equally small share in the United States. The new company
intends to pursue growth opportunities in both mature and emerging markets.
This more diverse geographic presence will make the combined company less
vulnerable to the financial impact of a downturn in the United States than
Chrysler has been by itself. With a yearend 1997 combined net cash balance of
$9.9 billion, the new company will have the financial resources to pursue
attractive growth prospects.
The potential benefits from taking advantage of economies of scale in
purchasing, engineering, research and development, technology sharing and
distribution logistics are significant. Management of the new company expects
to realize benefits of $1.4 billion in 1999 (the first\full year of merged
operations) and yearly benefits of $3 billion within three to five years. The
merger brings with it some challenges. The combination of two large, strong
auto companies headquartered in different continents is unprecedented. The
meshing of corporate cultures and management responsibilities is a critical
issue. A myriad regulatory, legal, tax, accounting, operational and labor
issues will have to be dealt with. The reaction of major competitors is
currently unknown. However, significant moves by other companies in the
industry are likely. The way in which the combined company handles these
challenges will go a long way in determining whether the financial benefits
mentioned above are realized or even exceeded.
DCR will continue to monitor and assess developments as they occur and as
more details about the new company's operational and financial strategies
become known. Rating actions will then be taken as appropriate.
SOURCE Duff & Phelps Credit Rating Co.
