Novice Investing - Should Magna Buy Chrysler?

Date: Tuesday 13th 2008f May 2008 07:03:48 AM

Should Magna Buy Chrysler? - 04/01/2007

By: Novice Investing Staff

In another development for Chrysler unit of Daimler Chrysler (DCX), our sample portfolio pick Magna International (MGA) appeared to team up with private equity group to bid for Chrysler. Daimler bought Chrysler for $ 36 Billion back in 1999. However, many feel that Chrysler unit will fetch a maximum of $ 13.7 Billion. This is due to the $ 19 Billion potential liability of health care benefits for unionized retirees. Daimler Chrysler stock meanwhile, is valued at $ 84.11 Billion at recent price.

Of course, Magna won't probably do it alone. It has a market capitalization of $ 8.26 Billion and around $ 1 Billion in positive net cash. Thus far, Chrysler is attracting bid of more than $ 6 Billion which is doable if Magna go all of it alone. However, Magna balance sheet becomes quite leveraged and it won't be able to have any financial flexibility if Chrysler unit is struggling (which is their current situation). Magna's current business generates about $ 1.5 Billion in cash flow. If Chrysler unit continues to struggle, with say $ 6 Billion in debt, interest expense alone costs $ 360 Million annually. The Chrysler unit may easily loss up to $ 1 Billion annually, considering the tough business condition. Therefore, Magna will not have any other means to repay the debt if Chrysler unit stays stagnant. Businessweek reported that Magna will team up with private equity group Ripplewood Holdings.

To rejuvenate Chrysler, Magna will need a lot more than manufacturing expertise. Magna had been building car parts for Chrysler which is a good expertise to have. However, it has no experience of bringing cars to the mass. Thus, the most logical choice for Magna is to buy a minority stake in Chrysler.

Chrysler accounts for 16% of Magna's total revenue. While that is so, we feel that other buyers will cut Magna out of their manufacturing ties. Chrysler purchase doesn't make sense, as long as Magna continues to be efficient. Perhaps Magna founder and chairman wants to print some legacy. Or, some other non-financial reasons that we don't know. Only time will tell.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Magna International Inc. (MGA) or any other securities.

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