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Union Cracks in DaimlerChrysler Deal

While Detroit wins one battle with the UAW, key labor talks this fall may be tougher.
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Updated from 2:16 p.m. EDT

The resignation of the United Auto Workers union to a private-equity takeover of the Chrysler Group is a sign that Detroit's old order is starting to crumble, and the U.S. auto industry is headed for a tough battle with labor in negotiations this fall.

DaimlerChrysler

(DCX)

agreed over the weekend

to sell an 80% stake in its struggling U.S. business to Cerberus Capital Management for $7.4 billion. After unburdening itself of the bulk of Chrysler's losses and its roughly $19 billion in pension and health care liabilities, the German automaker will seek to restore its brand name to just Daimler.

Chrysler will find itself in the clutches of a private-equity maven with a history of buying bloated businesses and then slashing costs and payrolls, shuttering factories and moving production to low-cost labor markets overseas.

Ron Gettelfinger, president of the UAW, said in a statement that after it became clear that Chrysler could no longer stay under the umbrella of its German parent, he "concluded that the transaction with Cerberus is in the best interest of" the union's members, the Chrysler Group and Daimler. On WJR-AM in Detroit, he said he would have "preferred the status quo, but it's not there."

Speculation has been running rampant that DaimlerChrysler would sell the Chrysler Group since its CEO, Dieter Zetsche, said the company was exploring "all options" for the business in February, after it recorded an operating loss of $1.48 billion for 2006.

(Editor's Note: Nat Worden sat down today with Editor at Large Aaron Task to discuss the Chrysler sale. Click here to watch the video)

.

"We are satisfied now that the decision has been made so that our membership and management can focus on designing, engineering and manufacturing the finest quality products for the future success of the Chrysler Group," said Gettelfinger.

The remarks contrast with previous statements from organized labor that sounded staunch opposition to a private-equity acquisition of Chrysler. Morningstar analyst John Novak points out that the only non-private-equity suitor for the company that was reportedly in the running was

Magna International

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, a Canadian auto-parts maker that has long eschewed organized labor.

"The UAW would be facing the same issues regardless of who turned out to be the ultimate acquirer here," says Novak. "This is a sign that the union is really resigned to the fact that they just can't do much at this point, and they're choosing for the moment to take a more constructive approach to this thing than putting up a fight.

"Certainly, down the road, they have the opportunity to throw a wrench into any significant cost-cutting plans that Cerberus might attempt to make, but that was going to be true of any company," adds Novak.

The UAW now faces the prospect of negotiating with another struggling automaker in Detroit that doesn't have a thriving European parent company to finance its operational difficulties. Last summer, the union refused to make the same concessions on health care costs with Chrysler that it made with its counterparts,

General Motors

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and

Ford

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, because of the superior financial performance of DaimlerChrysler.

"Cerberus will look for the same concessions now that Ford and GM have gotten, and the union will make them," says George Magliano, director of automotive research with Global Insight. "They know they have to work with those people. Detroit is fighting for its life, and the UAW is fighting for its life. This means they're going to have to work together."

Meanwhile, the industry will be looking for further cost cuts in negotiations over its master labor contracts with the UAW, which are scheduled to take place this fall. Currently, U.S.-based automakers are bleeding market share to foreign-based manufacturers, like

Toyota

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and

Honda

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, which enjoy a lower-cost business model with respect to hourly workers and pension and health care obligations.

On a conference call on Monday, Zetsche said the deal with Cerberus is "not conditional on any aspects of a collective bargaining agreement."

The

Associated Press

reported that Canadian Auto Workers President Buzz Hargrove said he was assured that the collective bargaining agreement with Chrysler would be honored by Cerberus and that no jobs would be eliminated as a result of the deal.

Hargrove also told

The New York Times

that he was "not at all comfortable" with Cerberus as a buyer for Chrysler.

"The history of private equity has been to buy, then slash and burn a lot of jobs, and then get out with a lot of money for a handful of people," said Hargove, according to the

Times

.

Cerberus Chairman John Snow, a former U.S. treasury secretary, said on WJR-AM in Detroit that the UAW's role at Chrysler will be "respected and honored." At a news conference in Germany, Snow said his firm would invest in Chrysler for long-term growth and allow it to rebound without being hindered by the short-term focus of the public financial markets.

"We think at this particular point in Chrysler's history, there may be opportunities in the private world, the world of private investment, that create more room for growth and expansion, that allow management to focus with greater intensity on the day-to-day business of producing better cars," Snow said.

For its part, Cerberus has been quietly amassing an arsenal of assets in the auto industry. Most notably, the firm acquired a majority stake in General Motors' finance arm, GMAC, and it also owns stakes in

Tower Automotive

and two rental-car companies,

Alamo

and

National

.

Analysts say that the firm may seek to join Chrysler's finance business with GMAC to build a giant auto-loan company. Also, there are opportunities to grow Chrysler's brands, which include Jeep and Dodge, in emerging markets like China and India.

In December, Cerberus was part of a consortium of investors that agreed to invest $3.4 billion in

Delphi

, GM's chief auto-parts supplier and former subsidiary that is currently locked in bankruptcy negotiations with the UAW over cost reductions. Ultimately, the firm backed out of the deal after the UAW refused to make concessions in labor costs for the company.

"That was maybe a bit of a flinch from Cerberus in the eyes of the union," says Argus Research analyst Kevin Tynan. "Maybe they view Cerberus as a firm they know how to deal with."

Elsewhere, reports that the Ford family is considering a sale of its controlling stake in the No. 2 U.S. automaker lent to a perception on Wall Street that the barriers to aggressive restructurings for the U.S. auto industry are coming down. Shares of Daimler Chrysler were recently up 2.3%, while shares of GM and Ford were up 3.8% and 4.4%, respectively.

"We view the Chrysler sale news as favorable for GM and Ford," said Bear Stearns analyst Peter Nesvold in a note to clients. "In particular, we are favorably impressed with the UAW's seemingly evenhanded initial response to the news, considering how adamantly negative the union had sounded against a sale to private equity just a few weeks ago. In our view, the sale opens the door for further restructuring in Detroit generally."