May 14 (Bloomberg) -- DaimlerChrysler AG agreed to sell the Chrysler unit to Cerberus Capital Management LP for 5.5 billion euros ($7.4 billion), abandoning a nine-year effort to make the U.S. division profitable.

Cerberus will buy 80.1 percent of Chrysler, with Daimler holding the remaining 19.9 percent and a new company will be formed to be called Chrysler Holding LLC, the Stuttgart, Germany-based automaker said today in a statement. The transaction will be completed in the third quarter.

Cerberus purchases a company that lost 500 million euros last year and shed market share to Toyota Motor Corp. while relying too much on the stagnant North American market. DaimlerChrysler Chief Executive Officer Dieter Zetsche failed to keep the U.S. carmaker profitable after completing a reorganization he began as head of the business.

``We're confident that we've found the solution that will create the greatest overall value, both for Daimler and Chrysler,'' said Zetsche in the statement. The company will change its name to Daimler AG.

Shares of DaimlerChrysler rose as much as 4.73 euros, or 7.8 percent, to 65.34 euros and were up 6.5 percent at 10:47 a.m. in Frankfurt. The stock has surged 31 percent since Feb. 13, the day before Zetsche said ``all options'' were on the table for Chrysler's future.

Cerberus's Contribution

Of Cerberus's total contribution, $5 billion will flow into the industrial business of Chrysler, $1.05 billion into Chrysler's financial services business, while Daimler gets the balance. Daimler will end up paying $650 million in the transaction, including granting a loan of $400 million to Chrysler. Existing projects with Mercedes will be continued and a joint council, consisting of management board representatives, will be formed to discuss business projects.

``The amount Daimler is having to pay is much less than feared,'' said Juergen Meyer, who manages about 1.3 billion euros at SEB Asset Management in Frankfurt. ``It's very important to look at the cash flow.''

United Auto Workers President Ron Gettelfinger said in the statement he supports the deal, terming the takeover ``in the best interests of our UAW members, the Chrysler Group and Daimler.'' Pension and health care costs associated with Chrysler will be taken over by the new company.

Chrysler sells fewer cars in the U.S. than General Motors Corp., Ford Motor Co. and Toyota, making it the fourth-largest U.S. carmaker. Daimler-Benz AG bought Chrysler Corp. in 1998 for $36 billion in what it billed as a ``merger of equals.''

Wolfgang Bernhard

Cerberus may have established itself as the front-runner by hiring former Chrysler Chief Operating Officer Wolfgang Bernhard as an adviser, Canadian Auto Workers union President Buzz Hargrove said yesterday. Bernhard, who left in 2004 after four years as COO, has a strong personal relationship with Zetsche, Hargrove said.

Last year, Cerberus led a group of investors that bought a 51 percent stake in finance company GMAC from parent GM, the world's largest maker. Detroit-based GMAC makes loans for purchases of homes and cars.

The firm was also part of a group that offered to invest $3.4 billion in bankrupt auto-parts maker Delphi Corp. Without giving a reason, Delphi said last month it expects Cerberus to back out, and Cerberus has so far declined to comment.

Cerberus and other private-equity firms are interested in the Auburn Hills, Michigan-based automaker because they expect to profit on their investment by reducing wages and paring other costs such as pension expenses.

Auto Division

Cerberus's auto division is run by former Ford executive David Thursfield, 61. The firm's acquisitions in the car industry include Peguform GmbH, a German manufacturer of plastic parts for vehicle interiors, as well as a controlling stake in GM's financing unit.

Stephen Feinberg, a trader at Drexel Burnham Lambert Inc. in the 1980s, started Cerberus with $10 million in 1992. He's since built it into a $24 billion investment firm that also owns Albertson's LLC supermarkets and IAP Worldwide Services Inc., one of the largest providers of logistics support to the U.S. Army in Iraq.

Daimler tomorrow may say Chrysler lost 908 million euros in the first quarter on the cost of job cuts and closing a factory, with group net income reaching 1.26 billion euros, according to the median of nine analysts surveyed by Bloomberg News. Year- earlier figures are not available because of an accounting change.

Net Income

Net income will fall by between 3 billion euros and 4 billion euros this year. The 19.9 percent stake in Chrysler Holding LLC will be included at equity in the van, bus and other segment for reporting purposes.

Chrysler CEO Tom LaSorda already is in the midst of a restructuring designed to reduce costs, including shedding 13,000 jobs and closing a Delaware manufacturing plant by 2010.

Canadian auto-parts supplier Magna International Inc. and a partnership with New York buyout firms Blackstone Group LP and Centerbridge Capital Partners LP have also been bidding for Chrysler. Magna announced May 10 that Russian billionaire Oleg Deripaska will buy a stake in the Canadian company, adding $1.54 billion in cash for a possible purchase.

With contract talks starting in July with the UAW, DaimlerChrysler's decision to sell Chrysler is a central element in its bargaining strategy with the union, said Cole of the Center for Automotive Research.

Management may be negotiating with private-equity investors to give UAW leaders ammunition to convince rank-and-file workers of the need for concessions, he said. Meanwhile, other potential buyers including Chery Automobile Co. Ltd. of China or Renault SA and Peugeot SA of France are biding their time, Cole added.

``They're waiting for the private equity companies to do some of the cleanup work to make Chrysler an attractive deal, where right now it probably isn't,'' Cole said.

To contact the reporters on this story: Jeremy van Loon in Berlin at jvanloon@bloomberg.net

Last Updated: May 14, 2007 06:04 EDT