GM Is in Talks to Sell Stake in GMAC

[mgescuro]

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GM Is in Talks to Sell Stake in Unit
Commercial Mortgage Unit May Raise Up to $1 Billion If a 50% Interest Is Sold
By DENNIS K. BERMAN and LEE HAWKINS JR.
Staff Reporters of THE WALL STREET JOURNAL
March 23, 2005; Page A3

General Motors Corp. is in discussions with a number of private-equity and other financial firms about selling a stake in its GMAC Commercial Mortgage subsidiary, said people familiar with the matter, in a deal that could raise as much as $1 billion for the car maker.

If struck, the deal would generate proceeds that would represent just a tiny portion of the $300 billion in debt that the auto giant has outstanding. Nonetheless, it would be a small step as GM attempts to recover from the dismal performance of its North American auto operations and tries to avert the threat of a credit downgrade.

GM's commercial-mortgage business collects payments on mortgages valued at more than $247 billion, while originating loans in sectors ranging from health care to golf courses.


The people familiar with the situation said the unit could be valued at anywhere between $1 billion and $2 billion. Should outside investors take as much as a 50% stake, that could generate as much as $1 billion in proceeds.

GM last year had said it was selling the unit, and news reports said the Philadelphia-area subsidiary was near a deal with Deutsche Bank AG. But that combination never materialized, and the company said it was content holding the businesses. Private-equity firms, however, began inquiring about the unit and are now in negotiations about structuring a deal that would keep GM as a significant shareholder. While negotiations have intensified in recent weeks, these people say, there is no guarantee that a deal will be reached.

Over the past few years, the GMAC financing subsidiary -- of which the commercial-mortgage unit is a part -- has contributed the majority of GM's profit. This year GMAC is expected to generate net income of at least $2.5 billion, although that will be down from 2004 as a result of higher interest rates.

Still, the contribution from GMAC will be welcomed by GM. The world's biggest auto maker warned Wall Street earlier this month that it expects to incur a loss of $1.50 a share in the first quarter of 2005, excluding special items, compared with a previous estimate of break-even or better. Instead of generating $2 billion in cash this year, as previously forecast, GM said it will burn $2 billion in cash, not including costs related to restructuring and its recent $2 billion settlement of a dispute with Italy's Fiat SpA.

"There was some interest expressed on the part of multiple parties to invest in our commercial-mortgage business. We're in discussions with those parties," said Toni Simonetti, a GM spokeswoman. "We are amenable to equity partners, but GMAC's intention is to maintain a significant equity interest in this business."

Ms. Simonetti declined to discuss which companies are seeking to invest or what their proposed investments would be valued at.

She said GMAC initially decided against selling the business in part on the basis that "the company didn't like the terms it was getting."

"It's a business that we like. It's a profitable growth business," Ms. Simonetti said. "In this funding environment, an equity partner is a source of funding. Clearly, it's something we are looking at, but there's nothing definitive at this point."

[LAMRONH]

So what's this, eating the seed corn?

[dawtcalm]

Isn't GMAC the ONLY reason they were in the black last year? Why keep selling off money making assets that ONLY delay the inevitable (Hughes)... When the inevitable finally happens you now have 0 other assets to diversify...

Man, I really like the GMAC real-estate incentive of $4 on every $1000 when you purchase a house, that bought our washer&dryer...

Even better that they considered selling it to a German company last year... :shakehead:

[goblue]

The conventional wisdom is that they are looking for cash anywhere they can find it. The unconventional or rather debatable position is that they are trying to set themselves up for chapter 11 in ways that aren't patently obvious (like spinning off GMAC en total would be)

[MCBond]

Correct me if I am wrong but I believe GM is only looking into selling the commercial branch of GMAC, they would still have the lucrative private mortgage, automotive and insurance branches.

GM will be taking a big hit in cash this year, which is something investors do not like to see, especially in todays market. The influx in cash might act as a reminder to the financial world that GM is a major player and although they have hit a rough spot, they have the means and determination to grow stronger.

[tom3]

Could be they see the mortgage market starting a decline and now would be a good time to cash in? Interest rates are rising and with the economy it it's present condition the market may be getting saturated with profit making, higher dollar, houses. Be nice to see GM making money on cars though.

[D C]

Interesting. Seems like GM would have lost a lot of $$ over the past few years had it not been for GMAC. I would think that any number of companies would love to have the revenue generation of GMAC. Seems silly to me for GM to sell something that everybody wants. Kinda like selling off the bits & pieces of Hughes. For the longest time, it was great, making tons of money and everyone wanted to buy it.

Seems kinda like going to the prom with the prom queen and letting her go home with someone else.

[SteveWallace]

Originally Posted by goblue

The conventional wisdom is that they are looking for cash anywhere they can find it. The unconventional or rather debatable position is that they are trying to set themselves up for chapter 11 in ways that aren't patently obvious (like spinning off GMAC en total would be)

That is an interesting point, but I wonder how teh new Chap 11 laws would effect this.

[vxl]

In an earlier thread I wondered when the asset sales would start. Let's wait for the "for sale" sign to be raised on Suzuki, Subaru, Isuzu and more chunks of GMAC.

I also hope they don't squander any raised money on more rebates.

[doh]

Originally Posted by MCBond

Correct me if I am wrong but I believe GM is only looking into selling the commercial branch of GMAC, they would still have the lucrative private mortgage, automotive and insurance branches.

GM will be taking a big hit in cash this year, which is something investors do not like to see, especially in todays market. The influx in cash might act as a reminder to the financial world that GM is a major player and although they have hit a rough spot, they have the means and determination to grow stronger.

I bet that most of GMAC commercial mortages are GM dealers, both buildings and floor plans. This would not go over very well in the eyes of these dealers. When things are slow GMAC has a whole different out look on over stock situations than a Duetshe bank would.

[gmsickofan]

This sale would be a drop in the bucket when all of those pensioners and health care costs are considered.... Maybe one-fifth of annual health care costs?

[Globalist]

GMAC is very profitable, and was the major contributor to GM's bottom line. However, a growing mortgage business generates most of the debt in GM's balance sheet. This is fine because this debt is backed by assets, but you still need to borrow if you want to grow, and with current raising interest rates, and GM actual debt grade, it's maybe better if GM could find a partner whith a better grade who could share the load with GM.

I think it's a wise move.

[ImajV]

Long-term, i think its a good decision, since we dont want the General becoming a massive bank on wheels. and rising interest rates will bite into earnings, so theres a business case for it

[paul3230]

Originally Posted by goblue

The conventional wisdom is that they are looking for cash anywhere they can find it. The unconventional or rather debatable position is that they are trying to set themselves up for chapter 11 in ways that aren't patently obvious (like spinning off GMAC en total would be)

Wow...that's a great point...I mean it would be the perfect setup. GM..at this moment depends so heavily on GMAC to prop up it's finances that if it could show the goverment that it's burning through billions of dollars of cash it has to have chapter 11 protection. Ultimately restructering would be the best way for GM to get from under the legacy cost of health care

[FusionSVT]

I apoligize if someone else already posted this or realized this, and with that said ill start. In order for them to file for Chapter 11 theyll need to get rid of GMAC since its still in black. Theyre shrinking down before they file for chapter 11 in other words. This is proably the biggest HINT HINT WE'RE FILING FOR CHAPTER 11 i've seen so far, besides the drop in stock, and selling of a brand.

When and if they go before a judge to request Chapter 11 status theyll have to prove theyre making a loss and in their situation they need to be eligible for chapter 11 status. They cant do that with GMAC still attached and in black sadly. Its seems GM is faced with 2 poisons. Either keep GMAC and risk the automotive business going into further losses plus keeping the high fixed costs. Or Spinoff GMAC, file for chapter 11, eliminate the fixed costs, eliminate a brand, and become a slimmer more profitable GM with a long term possibility of expanding again.