Wagoner: GMAC sale will fund GM turnaround

Jamie LaReau | | Automotive News / April 3, 2006 - 8:15 am





DETROIT -- General Motors CEO Rick Wagoner said the $14 billion deal to sell 51 percent of General Motors Acceptance Corp. will help the automaker complete its turnaround plan in North America.

GM on Monday announced a deal to sell a controlling stake in its financing subsidiary to a consortium led by hedge fund Cerberus Capital Management LP.

The long-awaited sale will generate much-needed cash for GM, which reported a $10.6 billion loss in 2005. GM hopes the move will restore the financing unit's credit rating to investment-grade status, giving it better profits on loans.

"This will provide GMAC with a stronger financial position and help it sustain growth," Wagoner said during a morning press briefing at GM's headquarters here.

Wagoner said GMAC is not a "cash cow" but generates a lot of earnings for GM.

"The good news coming out of this transaction is we expect GMAC to resume its earnings growth, and we'll be 49 percent of that," Wagoner said. "I think it's a good deal."

So does Wall Street. GM shares rose almost 3 percent in premarket trading.

Wagoner said that in the long term, GMAC earnings will stabilize and its opportunity for financial growth is greater.

The Cerberus-led investor group includes the private equity unit of Citigroup and Japan's Aozora Bank Ltd, a portfolio company of Cerberus.

Wagoner said proceeds from the deal will support GM's North American turnaround plan. The deal also will help finance GM's growth, strengthen its balance sheet and fund other corporate priorities.

GM said it expects to receive about $14 billion in cash from the transaction over three years, including distributions from GMAC, with an estimated $10 billion due by closing in the fourth quarter of this year.

The $14 billion includes $7.4 billion from the Cerberus-led 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 to limited liability companies.

GMAC executives feel confident GMAC can get a stable investment credit rating once the deal is closed, GMAC CEO Eric Feldstein said at the press briefing. GM's Residential Capital Corp., its residential mortgage subsidiary, will stabilize above investment grade, he said.

GM said it will retain GMAC's automotive lease and retail assets and associated funding with an estimated net book value of $4 billion that will monetize over three years. GM will take a noncash pretax charge to earnings of $1.1 billion to $1.3 billion in the second quarter of 2006 associated with deal.

Fitch Ratings said on Monday it had put GMAC on watch for a likely upgrade.

GM and the consortium will invest $1.9 billion of cash in preferred equity in the new GMAC - $1.4 billion to be issued to GM and $500 million to the Cerberus group.

GM also said Citigroup will arrange two syndicated asset-based funding facilities that total $25 billion, which will support GMAC's ongoing business. Citigroup has committed $12.5 billion to these two facilities.

The GMAC board of directors will have 13 members - six appointed by the consortium, four appointed by GM and three independent members. GMAC will continue to be managed by its existing executive management. GMAC's staffing level is expected to remain constant.

Under the agreement, GM will have an option for 10 years to acquire GMAC's automotive finance operations, under conditions that include an investment-grade debt rating at GM.

Shares of GM rose to $21.85 on the Inet electronic brokerage system from a close of $21.27 on the New York Stock Exchange on Friday.

GMAC's 8 percent bonds due in 2031 rose to 96.25 cents on the dollar, up from 94.75 cents on Friday, according to MarketAxess.

 

And here are the details:

 

.... but ended the day down 5.3% @ $20.14 on Tuesday

 

Thank you... (sadly)

Again... thank you.

What GM just did is like selling your arms to make your legs stronger.

You can't keep selling parts of you that are making a profit, to feed the part of you that is eating the money all up. After all these recent divestitures, GM will REALLY have to do good in car sales or their profitability won't exist at all because all the groups that were making money will be gone.

 

I said that it benefits them in both the short AND long term. An immediate cash infusion is needed right now, especially with the uncertainty over the Delphi situation, and the employee buyout plan. Also, GMAC's bond status was tied to GM's, which is rated at "junk" right now. That makes it very difficult for GMAC to lend out money at a competative rate. By selling off controlling interest in GMAC, it removes the ties to GM's rating, and will make GMAC a healthier and more profitable company moving forward. And GM will still benefit from that via their 49% stake in it.

 

That's the point. They are selling off the parts that aren't directly related to the car business so that they can invest and concentrate on their core, the car business.

By your logic, they might as well sell off their car business and just concentrate on being a holding company for varied industries like GMAC, Hughes, etc..

 

The whole point is to do whatever it takes to make a profit, right? :blah:

How about this...
STOP representing yourself as some kind of discount auto house where everything is always on sale or comes with a rebate. It cheapens your image, regardless of what it does to short-term sales.

Start making inroads with the consumer by asking what they want and making it for them instead of force-feeding them stuff they don't care for. Chrysler seems to have mastered this.

Start fighting the propaganda that is spouted by the media that perpetually claims "imports are better" because it's fad right now.

Invest your money (what youy have left) into lengthening warranties and improving service to PROVE your cars and service are equal or better than the imports.

STOP trying to save $3/car by using cheap materials when you are trying to prove yourself as a world-class manufacturer. $3 is nothing when I am spending $30,000 on a car, and I want it "right".

START letting the engineers, designers, and workers have more say-so on what product goes to the public - as opposed to the board of directors and some good ol' boy product committee.

There are lots of things that can be done to help turn the car business around and NOT have to keep divesting yourself of profitable entities.

I simply don't agree that divestiture is a good way to revamp a manufacturing operation, or to sustained profitability.
"It ain't fixing what's broke."

 

Proud, I dont think anyone will disagree with the points you made, but if they dont sell GMAC where do they get the money to do the stuff you suggest? I dont think borrowing money is an option at this point.

 

GMAC wasn't going to be able to be as profitable as it could be while being tied to GM's bond rating. And GM will still benefit from GMAC's success since they continue to control 49% of it.

 

I never bought the argument that "49% of a profitable company is better than 100% of a less profitable company". After all if we are to believe GM that a turnaround is in progress, then it follows that GM's credit rating will eventually be restored and GMAC will return to full profitability. I think that right there is what changed my perception of GM's situation: obviously GM must not believe in the turnaround themselves and must think their financial health will not be restored any time soon. Otherwise why give up their most reliable revenue stream?

Someone should try to add up the total losses of NAO over the last 15-20 years. I wonder if an 8-digit calculator would be up to the task ? Why sell off moneymakers like GMAC, Hughes, GM Defense, etc. to concentrate on a money-losing core? GM has repeatedly shown that they can't make money with NAO, so why hinge the corporation's very survival on such a weak unit? At least with the other businesses it balanced out the automotive cycle and added cash to the balance sheet. I guess this was the second red flag to me that's GM's condition is worse than I thought: they are so desperate that they're selling off all their profitable assets. Most smart companies sell off their under-performers to focus on their strengths, but not GM.

 

GM auto products are turning around. Problem is timing. Going to be close... Stock is back under $20 so far today (tuesday)

 

Conventional loans are surely out the door based on their ratings with investors - no question.

However, I think there are investors and lenders who would still make equity loans. The consortium that just bought 51% of GMAC would probably have entertained an equity offering just the same. "Loan" GM the money, while holding their shares as equity... GM pays interest on the loan, and pays off the principal over time.

One really needs to look no further than Chrysler's example from the 1980s - talk about a turnaround.
The government gave them an equity-based loan... they not only paid the interest, but paid back the principle and completed the payback ahead of schedule. The government made money, Chrysler survived, and both came out better for the deal.

R377 has got the right frame of mind. Apparently he and I are on the same page. Nice post there buddy.

 

MATH-101 is in session...

100% of $10 = $10
49% of $15 - $7.35
$10 is more than $7.35 - ALMOST 50% more! That's a lot!

The above example even gives YOU the benefit of the doubt in that I assumed that GMAC increased their profit by 50%!!! which is highly unlikely.

What is MORE LIKELY to occur is their profits may go up 4-7% over the next year or two, which means GM will still get only $5.14 to $5.41 per $10 that they SHOULD have gotten if they had kept their entire equitable holdings.
And agin - they no longer "control" GMAC... the company will be steered by their new owners in consortium. Who knows, they may decide to vote out and buy out GM's remaining shares in the future... they have controlling interest, they can craft a hostile takeover if they choose to.

Me - personally - I would not give up 51% of one of my best income generators at a time when cash-flow could be my lifeline.

I quit on this one... it's a subjective issue, and we all would handle it in different ways. The only way to prove which is right is to actually play the cards and see what happens.

 

Yes, but they also made money on the "$5.01" that they sold. :sigh:


Do you actually understand the mortgage industry and what a bad bond rating means for a lender?

 

Strictly from a business standpoint, this might be the best thing they could do for the shareholders...but they probably couldn't sell their auto business if they wanted to due to the level of debt...so they sell off the parts that are worth money...