Russian Investment in Magna Could Help Canadian Auto Supplier's Pursuit of Chrysler

TORONTO May 10, 2007; Tom Krisher writing for the AP reported that a Russian industrial conglomerate will sink $1.54 billion into auto parts supplier Magna International Inc., raising speculation that the Canadian company is generating cash for a bid to buy Chrysler.

Just hours before the start of its annual shareholders meeting, Magna said that Russian Machines, a unit of privately held Russian industrial conglomerate Basic Element, would indirectly acquire 20 million Class A Subordinate Voting Shares of Magna.

Aurora, Ontario-based Magna said it will use the investment to boost its efforts in Russian and other automotive markets.

After the annual meeting, Magna founder and Chairman Frank Stronach said he did not think the investment would have any bearing on the company's efforts to buy Chrysler, although he thought the Russian partner would make Magna more attractive to Chrysler's German parent, DaimlerChrysler AG.

He said Magna sought the Russian partner because of the potential for rapid growth in its car market, and out of fears that the North American automakers, with whom Magna does a substantial amount of its business, will struggle to compete globally.

"Things are too costly in North America," he told more than 1,000 shareholders and employees in a Toronto concert hall. "I do have a worry that the American car industry is not really competitive."

Rich Morrow, an analyst with Jennings Capital Inc. in Toronto who follows Magna, said it's likely the company is raising money for its bid to buy Chrysler.

Under terms of the agreement with Russian Machines, Magna would remain a Canadian company with shares listed on the Toronto and New York Stock exchanges.

For its $1.54 billion, Russian Machines would get about 18 percent of Magna's Class A shares, but also would get 42 percent of the shares in a new holding company that would be formed to run Magna. A trust controlled by Stronach would get 42 percent, with the remainder held by Magna senior management.

Magna also would repurchase all Class B shares not held by the Stronach Trust. Each Class B share now comes with 500 votes, but that would be reduced to 300 under the complex deal.

"Our partnership will accelerate Magna's growth in Russia and surrounding countries, markets that we see as holding significant opportunities for us," Stronach said.

Stronach reiterated Magna's hopes to buy into Chrysler with its partner, Canadian investment firm Onex Corp., and left open the possibility of additional partners.

"We'd like to partner in an orderly transition so that Chrysler can be viable," he told reporters after the meeting, adding that there are indications that DaimlerChrysler would retain a small interest in Chrysler under any deal.

Analysts have speculated that Magna would submit a bid of $4.7 billion for Chrysler, which last year lost $1.5 billion.

Buzz Hargrove, president of the Canadian Auto Workers union, said that the Russian investment fits with Magna's interest in buying Chrysler.

"I don't think there's any question that Magna is trying to put together a proposal that would include partners," Hargrove said. "It's just another player. ... We're going to wait and see how it unfolds."

Russian Machines and the Stronach Trust each would nominate six board members for the holding company, and Magna's two co-chief executives also would be nominated.

The deal gives Stronach control of about 66 percent of Magna's share votes, down from the current 71.9 percent, said Chief Financial Officer Vince Galifi.

The transaction, which was approved by Magna's board, is subject to court, regulatory and shareholder approvals.

Russia is one of the world's fastest-growing auto markets and is increasingly being targeted by the giant global manufacturers, looking to offset stagnant markets in the United States and Europe.

Russian Machines already controls Russia's second-largest automotive company, OAO GAZ, which makes cars, buses, minivans and trucks. Magna has a joint venture with GAZ to produce some car parts.

Magna also has a partnership deal with Russia's largest carmaker by volume, OAO Avtovaz, that could see the creation of a local joint venture.

The partnership with Russian billionaire Oleg Deripaska, who owns Basic Element, could give further strength to Magna's push to buy Chrysler.

Among the other companies reportedly interested in Chrysler are private equity firms Cerberus Capital Management LLC, a consortium of investors led by Blackstone Group, and General Motors Corp. None has confirmed an interest. Billionaire investor Kirk Kerkorian, who tried to take control of Chrysler in the 1990s, also has said he would make a bid.

Also Thursday, Magna reported net earnings of $218 million, or $1.96 per share, for the third quarter, up 3 percent from a year-ago period that was loaded with restructuring costs. Adjusted profit declined due to higher costs and lower auto production in North America.

Magna has more than 82,000 employees in 22 countries around the globe, according to its Web site.

Associated Press Writer Jeff Karoub in Detroit contributed to this report.

Chrysler Group: http://www.chrysler.com

Magna International Inc.: http://www.magna.ca