GM Selling Finance Subsidiary

April 3, 2006






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Hoping to raise cash while also boosting the sagging debt ratings of its finance subsidiary, the troubled auto giant General Motors Corp. has sold a majority stake in its lending arm, General Motors Acceptance Corp.


Barring a last-minute regulatory hitch, hedge fund giant Cerberus Capital Management expects to take 51 percent of GMAC in a deal likely to be completed by the fourth quarter of this year. The sale should quickly generate $10 billion, including $7.4 billion from Cerberus, for cash-short GM, and about $14 billion in total over the next three years.


“It’s a home run,” declared the automaker’s CEO, Rick Wagoner.


“Our investment,” added Cerberus CEO Mark Neporent, “is a vote of confidence in GMAC, GM and America.”


Struggling to stave off increasing financial problems and to fund a proposed bailout of its former parts operation, Delphi Corp., GM has been selling off a number of assets in recent months. It shed its stake in two Japanese affiliates, Fuji Heavy Industries and Suzuki, and last month sold off a majority stake in its commercial mortgage operations. But the deal with Cerberus is by far the most significant move GM has made in years.


Raising cash was only one of the reasons behind the move. As the automaker’s fortunes have sagged, in recent years, its credit ratings have fallen into junk bond territory. That’s particularly problematic for a lender like GMAC, which writes billions of dollars in loans every year.


With the support of Cerberus — and partners in the deal that include financial giant Citigroup — “(We) believe we’ll be on a path of stable, investment-grade ratings” by the end of the year, when the sale is completed, insisted GMAC CEO Eric Feldstein.


The deal generated mixed response, however, from analysts. “Based on our preliminary assessment, we currently believe that if the transaction is completed as proposed, GMAC’s long-term rating would be raised to “BB+,” said Standard & Poor’s credit analyst Scott Sprinzen.


However, there was concern about the impact of the sale on GM itself. Deutsche Bank Securities analyst Rod Lache told investors, “GM deciding to cede control of this strategic business (could) wind up being another strategic error.”


General Motors Chairman Wagoner acknowledged that there could be a downside to the deal, as it will divert a bit more than half of GMAC’s hefty profits to Cerberus. But the new partners agreed that in the long run, rebuilding the finance unit’s debt rating while giving it access to more capital should help it grow significantly, and boost profits for everyone.


Under the deal, Cerberus will get six seats on GMAC’s new board, while GM will get four. Another three will be filled by outsiders. But the agreement ensures that the automaker and its dealers will continue to have to access to the same range of loans, leases, and other financial services currently available.


GM will also have a ten-year option during which it could re-acquire GMAC’s automotive operations. Those lines of lending account for about half of its overall business.


During a news conference at GM’s Renaissance Center headquarters, Wagoner appeared visibly relieved to get through the sale, which was first discussed last autumn. Now that it is effectively in place, Wagoner also noted that chief financial officer Fritz Henderson will be able to divert his attention to another problem plaguing GM — the crisis at its former parts-making subsidiary, Delphi Corp.


Last Friday, the bankrupt supplier asked the court to permit it to void its labor contracts with six unions, including the United Auto Workers. The UAW has threatened to strike if the proposal is approved, and analysts fear that a protracted walkout might drive GM itself into bankruptcy. The carmaker has proposed a multi-billion-dollar buyout of Delphi workers, with thousands of others being allowed to move to GM plants.


Sources close to the General Motors board have indicated there’s growing uncertainty about Wagoner’s leadership of the troubled carmaker, and the eventual resolution of the Delphi dilemma could make or break his career.


During a question-and-answer session with reporters, Wagoner tried to flash a bit of humor, suggesting that “I appreciate support from the board, our workers, my wife — anybody I can get it from these days.”

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