GM to sell finance arm for $14 billion

GM to sell finance arm for $14 billion (story link)

Investors' group will get a 51 percent stake in GMAC while automaker keeps lease and retail assets

SARAH KARUSH / Associated PressApril 3, 2006

DETROIT -- General Motors Corp., which is struggling to turn around its North American automaking operations, announced Monday that it has reached an agreement to sell a 51 percent stake in its profitable finance arm.

GM said it expects to receive about $14 billion from the sale of General Motors Acceptance Corp. over the next three years.

The stake is being purchased by a consortium of investors led by Cerberus Capital Management L.P., a private investment firm. The group also includes Citigroup Inc. and Aozora Bank Ltd.
GM will receive $7.4 billion from the consortium at closing and an estimated $2.7 billion cash distribution from GMAC related to the conversion of most of GMAC and its U.S. subsidiaries into limited liability companies.

In addition, GM will retain about $20 billion of GMAC automotive lease and retail assets and associated funding with an estimated net book value of $4 billion that will monetize over three years.

The companies said they expect to close on the sale in the fourth quarter of 2006.

Despite the boost GMAC is giving to the automaker's bottom line, GM has sought to sell the GMAC stake to raise cash and restore the division's debt ratings, which were downgraded along with GM's to junk status last year. A rating below investment grade makes it harder and more expensive to borrow money.

Ratings agencies took no immediate action on Monday's announcement. GM shares fell 4 cents to $21.23 in morning trading on the New York Stock Exchange.

GM Chairman and Chief Executive Rick Wagoner said the sale would boost GM's liquidity and help strengthen the balance sheet as the automaker carries out its turnaround plan. The company lost $10.6 billion in 2005 and has been rapidly losing market share to Asian competitors.

Wagoner pointed to recent achievements in cutting costs, including a deal with the United Auto Workers that was approved by a federal judge on Friday and requires retirees to shoulder more of their health care costs. A recently announced early retirement and buyout plan is expected to move GM closer to reducing its hourly work force by 30,000 by 2008.

"In the context of history, the last six months are going to prove to be pivotal," Wagoner said at a news conference. "This is about restructuring our business so we can be robustly profitable in the future, so we're not so balanced on a razor's edge (that) if gas prices go up, you don't make any money, if your sales go down 10 percent you don't make (any money)."

The next big issue for GM is averting a strike at its main supplier, Delphi Corp., which could shut down production at the automaker. On Friday, Delphi asked a bankruptcy judge to void its labor agreements, and the United Auto Workers said a strike would be inevitable if the judge agrees to it.

Wagoner declined to offer details about talks among Delphi, the UAW and GM, Delphi's former parent, saying only that he was optimistic about prospects for a deal.

Under the terms of the GMAC sale, the division will continue to provide GM and its dealers with the same range of financial products and services. GM will have a 10-year option to acquire GMAC's automotive finance operations, provided GM has an investment-grade debt rating and meets certain other conditions.

GMAC Chairman and Chief Executive Eric Feldstein, who will continue to lead the company after the sale, said Monday that "credit rating pressures" had held back the business.
"The consortium's equity ownership in GMAC is expected to delink the GMAC credit rating from that of GM, and as a result we believe GMAC will have much better access to low cost funding," he said at the news conference.

Standard & Poor's Ratings Services said if the GMAC transaction is completed as proposed, the division's long-term rating would be raised one notch to BB+, which is the agency's highest non-investment grade rating. S&P said it would finalize its assessment when the deal is closed.
Moody's Investors Service said the change in ownership won't immediately affect GMAC's Ba1 rating, which is the agency's highest non-investment grade rating. Moody's said problems at GM will continue to impact GMAC, and the agency said it may even lower GMAC's credit rating one notch.

Fitch Ratings placed GMAC on a watch with positive implications, saying the division's rating could be raised. But Fitch also warned that GM's troubles could continue to hurt GMAC's rating. Fitch currently has given GMAC a BB issuer-default rating, which is two notches below investment-grade.

News of the deal came amid speculation that Wagoner's future with the company is in doubt. GM's board of directors, which approved the sale at a special meeting Sunday, used Monday's announcement to reaffirm its support for Wagoner.

"While there is still much work to be done, the GM board has great confidence in Rick Wagoner, his management team and the plan they are implementing to restore the company to profitability," presiding director George Fisher said in a statement.

Wagoner said he was grateful for the vote of confidence.

"I appreciate support from the board, our workers, my wife - anybody I can get it from these days," he said.