Magna International Inc. shares jumped Monday after an analyst report outlined the potential benefits of the Canadian auto parts giant purchasing a 30-per-cent stake in Chrysler Group.
The analyst report came out as German newspaper Frankfurter Allgemeine Zeitung reported that senior executives of the parts maker will meet with representatives of DaimlerChrysler AG to discuss the sale of the money-losing division.
The Germany-based auto maker could announce a short list of one or two candidates to buy Chrysler by the end of the month and Magna is a leading contender, Patrick Archambault, who follows the company for Goldman Sachs Group Inc., said in a note to clients.
“Given [Magna's] inefficiently high cash balance and the absence of compelling investment opportunities in the sector, we believe a minority investment has a favourable risk reward tradeoff,” Mr. Archambault wrote.
He said he assumes a Magna-Onex bid of $5-billion (U.S.), financed 25 per cent with equity and the rest with debt.
The note helped propel Magna shares up $1.66 (Canadian) to $88.79 in trading on the Toronto Stock Exchange.
Magna reiterated last week what chairman Frank Stronach has said in recent months — that Magna is participating in the Chrysler discussions.
Mr. Stronach confirmed last week that Magna is in discussions with Toronto-based conglomerate Onex Corp.
“We believe a joint bid by Magna and Onex Corp. should have a reasonably strong chance of success,” Mr. Archambault wrote. “This is because of all the speculated bidders . . . we believe Magna clearly brings the most experience in the sector to the table.”
A new owner is likely to win from the United Auto Workers the same concessions on health care costs that the union gave Ford Motor Co. and General Motors Corp., he said.
So far, the union has refused to provide those concessions to Chrysler.
The only official bid that has been made public is that of Tracinda Corp., which has offered $4.5-billion (U.S.) with a number of conditions attached, including a deal with the United Auto Workers union.
Other bidders have been reported as private equity funds Blackstone Group LP and Cerberus Capital Management LP.
While Goldman Sachs was upgrading Magna shares to “neutral” from “sell,” Standard & Poor's Corp. said it would likely place its Magna rating on “credit watch with negative implications” if Magna announced a firm bid to acquire all of Chrysler or became substantially involved in Chrysler's operations.
“A successful bid to acquire or participate in Chrysler's operations could materially weaken the company's business risk profile as Magna could become exposed to Chrysler's difficult business environment and the need to tackle new challenges,” the credit rating agency said.
DaimlerChrysler put the future of Chrysler Group up in the air on Feb. 14 when it declared that all options for the future of the unit were under consideration.
Chrysler posted an operating loss of $1.5-billion in 2006 after the sudden and sharp rise in the price of gasoline sent sales of pickup trucks and sport utility vehicles skidding.
With files from Reuters and AP
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