GM Keeps GMAC On The Block

March 18, 2006


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General Motors Corp. is still pursuing efforts to sell off a majority stake in GMAC, its big financial subsidiary, as part of its restructuring plan.


However, the effort to sell off a majority interest in the General Motors Acceptance Corp. suffered a serious setback last week when GM announced it was delaying the filing of its annual report with the Securities Exchange Commission (SEC) because of accounting issues at ResCap. ResCap is GMAC’s residential mortgage subsidiary and has been one of its most profitable operations in recent years, making it essential to any spin-off. However, The Wall Street Journal reported Saturday that ResCap’s outside auditors had refused to sign the division’s annual audit report.

Jerry Dubrowski, GM spokesman, said GM is working to get the issues resolved and expects to file the annual report in about two weeks. The changes will not have any impact on net income at GMAC or at GM, which also disclosed that it was adding $2 billion to its overall loss for 2005, raising that figure to $10.6 billion.

The changes, however, could alter the amount GM reports as held in reserve in its final annual report, Dubrowski said.

The reports of accounting miscues at ResCap came at a sensitive time during the negotiations over GMAC’s future, and according to some reports, led to a new round of tough questions from GM’s outside directors for GM Chairman Richard Wagoner, who was on a trip to Daewoo, GM’s South Korean subsidiary. GM officials described the conference call as routine.

Toni Simonetti, GMAC spokeswoman, said GM was still actively pursuing the sale of a majority interest in GMAC to a third party. However, confidentiality agreements now in place meant she could not comment on reports about potential bidders, Simonetti said.


Other senior GM executives acknowledged the sale of GMAC has proven more difficult than expected. Besides the difficulty of the sale, some outsiders also have raised questions about the strategic wisdom of surrendering control of one of GM’s most critical and most valuable assets. GMAC has been the most profitable part of GM for more than two decades.

Reports circulating last week suggested that GM has been presented with two tentative bids for GMAC. One bid of $12.5 billion to $13 billion for a majority stake in its financing arm came from a group led byNew York private-equity firm Kohlberg, Kravis & Roberts and some banks, according to The Wall Street Journal.

The leading bid was reported to have come from Cerberus Capital Management, a private-equity and hedge fund group with ties to Citicorp.

GM’s management believes selling a stake in its finance unit to an outsider would bolster GMAC’s credit rating, which has been reduced along with the automaker’s to junk-bond status over the past year.
Moreover, GM’s credit rating could be reduced again in the wake of last week’s changes to the financial statements.

However, the potential buyers of GMAC business are concerned that a deal for GM’s finance company would leave them exposed to additional liabilities if GM ever were forced to file for court protection under Chapter 11 of the federal bankruptcy laws. Of particular concern is potential exposure to the long arm of the U.S. Pension Benefit Guaranty Corp., which guarantees the pensions of workers promised pensions by their employers.

GM’s latest accounting miscues were another issue for potential GMAC buyers already nervous about GM’s shaky hold on the affection of car buyers.

In an announcement that caught most investors by surprise, GM disclosed last week that it now estimates that it lost about $10.6 billion in 2005 compared with its preliminary report of a loss of $8.6 billion. After the announcement, GM’s stock lost 4.9 percent of its value in trading on the New York Stock Exchange.

Moody’s Investors Service said the delayed filing increases the risk of default and warned that it could further downgrade the long-term debt ratings of GM, GMAC, and ResCap.

The delay in filing the annual report and the disclosure of accounting errors “undermines management’s credibility with investors,” Morgan Stanley analyst Jonathan Steinmetz wrote in a research note. GM had already assured investors that it planned to file its annual report on time, he noted.

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