Wednesday, April 05, 2006

GM board backs Wagoner

GM board backs Wagoner (story link)

GMAC sale shows he's on right track, directors say

Bill Vlasic / The Detroit NewsApril 4, 2006

DETROIT -- General Motors Corp. Chairman Rick Wagoner received a much-needed vote of confidence from GM's board Monday after the automaker finalized a historic deal to sell a controlling interest in its finance division.

In an unusual show of support, GM's board of directors said the sale of 51 percent of General Motors Acceptance Corp. was a "milestone" in the company's turnaround plan and a validation of Wagoner's leadership.

"While there is 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," said George Fisher, who serves as the presiding director of the 12-member GM board.

Wagoner has come under heavy fire on Wall Street and in the media in the wake of GM's $10.6-billion loss last year and the steady erosion of its stock price and U.S. market share.

He said Monday that any measure of support is welcome given the storm of criticism engulfing GM.

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

The vote of confidence directly refuted rumors that GM's board has lost patience with Wagoner's methodical strategy to slash labor costs, streamline operations and restore profits.

"It needed to be said because the speculation was just running rampant," said David Cole of the Center for Automotive Research in Ann Arbor. "The board was upset that there was a feeling that Rick was being pushed out."

The timing of the board's statement was hardly coincidental, coming the day after the directors approved the GMAC deal at a special meeting.

The agreement to sell off control of GMAC to a blue-chip investment group will raise $14 billion in cash to help fund the dramatic downsizing of GM's troubled North American operations.
For Wagoner, the deal represents a critical step forward in his plan to remake GM.

"I think it's just what the doctor ordered," he said. "From a liquidity perspective, it's a home run."
But the sale of GMAC, which has been a part of GM for 87 years, also underscores the automaker's precarious circumstances.

The finance unit has been a steady source of income -- $2.5 billion last year alone -- at a time when GM's auto operations are bleeding red ink and its sales are declining. On Monday, GM said its U.S. sales fell 14 percent in March.

GMAC's auto-financing business is a crucial link between the automaker and its dealers and customers. But the dismal performance of GM has dragged the credit rating of GMAC down to junk-bond levels, driving up its borrowing costs and squeezing its ability to offer competitive loan rates to car buyers.

By splitting GMAC off from GM, the automaker expects that the finance business will once again achieve investment-grade credit ratings.

"We believe we'll be on a path to investment-grade rating at the closing or shortly thereafter," said GMAC Chairman Eric Feldstein, who will continue as chief executive of the unit after the sale.

The major rating agencies -- Standard & Poor's, Moody's Investors Service and Fitch Ratings -- took no immediate action on Monday's announcement, which had been expected for weeks.
The new majority owner of GMAC is a consortium led by Cerberus Capital Management, a New York-based investment firm, and the private-equity arm of banking giant Citigroup Inc.

GM will retain a 49-percent ownership stake and enter into a series of 10-year agreements under which GMAC will continue to provide car loans and other financial services to GM customers.

"We recognize that GM's dealers are a cornerstone for growth in this business, and we are committed to maintaining the strong support that GMAC provides top its dealer customers," said Lenard Tessler, a senior managing director of Cerberus.

GM also has a 10-year option to acquire the global auto-financing operation of GMAC if the automaker itself regains an investment-grade credit rating.

Under terms of the deal, GM will get $14 billion in cash from the transaction over the next three years. That includes $7.4 billion from the consortium when the deal closes later this year and a $2.7-billion cash distribution from GMAC.

Also, GM will keep about $20 billion worth of GMAC auto leases and other assets that will realize a value of $4 billion over the next three years.

GMAC's 33,000 employees worldwide, including a large number of workers in Metro Detroit, no longer will be GM employees, said Toni Simonetti, a spokeswoman for the automaker. Terms of employment, including pay and benefit levels, should be determined before the sale closes, she said.

Industry analysts cautiously endorsed the deal, which brought a higher price than was originally expected on Wall Street. GM stock closed at $20.14, down $1.13, in trading Monday on the New York Stock Exchange.

"The transaction will raise much needed cash as GM attempts the Herculean task of turning around its core auto business," said John Murphy of Merrill Lynch.
GM faces huge hurdles in the weeks ahead as it grapples with its most dramatic downsizing in nearly a generation.

The automaker is committed to cutting 30,000 U.S. manufacturing jobs and shutting 12 factories by 2008. To accelerate the attrition of workers, GM is offering buyouts or early retirements to all of its 113,000 hourly employees.

Another 13,000 hourly workers at GM's biggest parts supplier, bankrupt Delphi Corp., also will be eligible for the program. Getting those workers to retire will be a major factor in the pending reorganization of Delphi in U.S. Bankruptcy Court.

GM's chief financial officer, Fritz Henderson, said that solving the Delphi dilemma is the subject of ongoing negotiations between GM, Delphi and the United Auto Workers. Without an agreement, the UAW could strike Delphi and cripple the delivery of parts to GM factories.

"No one has more of an incentive to find a solution for this (Delphi) problem than we do," said Henderson.

You can reach Bill Vlasic at (313) 222-2152 or


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