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By Madeline Chambers
FRANKFURT, Nov 21 (Reuters) - DaimlerChrysler said on Friday it had sold its MTU aero engine business to U.S. private equity firm Kohlberg Kravis Roberts & Co (KKR) in the carmaker's latest step to shed non-core assets.
The German company declined to give a price for the sale, reported by Reuters last week, but sources close to the transaction have said that Daimler would sell the unit to KKR for 1.45 billion euros ($1.7 billion). The sale, to be completed by the end of December, will give a welcome boost to the bottom line of the world's fifth biggest carmaker as it struggles to return its U.S. Chrysler unit to long-term profits.
"It is right for Daimler to sell what they are not actively managing and what they don't want to invest in," said Juergen Pieper, an analyst at Metzler Bank in Frankfurt, noting however that this was not the best time to get a high price.
At 1123 GMT, DaimlerChrysler shares were up 0.1 percent, slightly underperfoming its European peers .
Five-year credit default swaps on Daimler's bonds were trading three basis points wider at 110 basis points. That means it costs an annual 110,000 euros to insure 10 million euros of Daimler debt for five years.
"Daimler default swaps are trading slightly wider, pretty much in line with the market," one trader said. "The sale was already priced in."
MTU, which makes turbines and other parts for several engine types, is one of the last non-core assets DaimlerChrysler has to sell. The business has over 8,300 employees globally and had sales of about 2.2 billion euros last year.
Daimler said in a statement MTU would continue its current project and cooperation agreements, notably its strategic alliance with U.S. aero engine maker Pratt & Whitney .
"The sale to KKR gives MTU Aero Engines new possibilities for the future," said DaimlerChrysler in a statement.
FOLLOWING FIAT
Daimler is the second European carmaker this year to sell its aero unit to a private equity firm.
In July Italy's Fiat agreed to sell its Fiat Avio aviation unit to The Carlyle Group and state-controlled defence firm Finmeccanica in a bid to cut its heavy debt load.
The Daimler deal brings an end to a months-long bidding process, in which Doughty Hanson and other private equity houses including The Blackstone Group and Carlyle came in and out of the race.
Although long flagged, the sale to a U.S. firm is surprising given that the deal was delayed by German government concerns about a foreign takeover of its defence businesses.
"We are looking forward to working successfully with MTU and aim to together exploit the opportunities arising in the coming years for this traditional yet innovative company," KKR said.
It said Credit Suisse First Boston, Commerzbank and JP Morgan arranged the financing while KKR was advised by Morgan Stanley and UBS.
In the last few years Daimler has sold its T-Systems software unit to Deutsche Telekom and its Temic electronics business to Continental .
Investors expect Daimler to eventually sell its 33 percent stake in aerospace group EADS , although last year the company said it would not do so for three to five years.
A roughly two billion euro write-down for its EADS stake nudged Daimler to a net loss in the third quarter, and some analysts doubt it will meet its full-year target of a roughly five billion euro operating profit, against 5.8 billion in 2002. (Additional reporting by David Wigan in London)