Wagoner: GMAC sale will fund GM turnaround

[nadepalma]

Source: http://www.autonews.com/apps/pbcs.dl.../60403001/1078

Wagoner: GMAC sale will fund GM turnaround
Jamie LaReau | Automotive News | April 3, 2006


General Motors Chairman and CEO Rick Wagoner shares a smile with General Motors Acceptance Corp. Chairman and CEO Eric Feldstein Monday after announcing GM had entered into an agreement to sell a 51-percent controlling interest in GMAC to a consortium of investors led by Cerberus Capital Management, Citigroup Inc., and Aozora Bank Ltd.

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.

You may e-mail Jamie LaReau at jlareau@crain.com

Reuters contributed to this report.

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Details of the deal

The following are the key points of General Motors's sale of a 51 percent stake in its financing arm, General Motors Acceptance Corp.:

-GM will receive $14 billion in cash as part of the transaction, including $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 to limited liability companies.
-In addition, GM will retain GMAC automotive lease and retail assets and associated funding with an estimated net book value of $4 billion that will monetize over three years.
-GM and the consortium will invest $1.9 billion of cash in new GMAC preferred equity -- $1.4 billion to be issued to GM and $500 million to the consortium.
-GM will continue to receive its 49 percent share of common dividends and other value generated by GMAC.
-GM will take a non-cash pre-tax charge to earnings of approximately $1.1 billion to $1.3 billion in the second quarter of 2006 associated with the sale.
-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.
-GM has an option for 10 years to acquire GMAC's global automotive finance operations, under certain conditions, including an investment-grade rating at GM.

[RamJet502]

I think it was a smart move.

[nadepalma]

Originally Posted by AutomotiveNews

-GM has an option for 10 years to acquire GMAC's global automotive finance operations, under certain conditions, including an investment-grade rating at GM.

This is good news, I guess, but it makes it sound like GM will be giving up the possibility of re-acquiring a majority stake in GMAC. This quote only affects their automotive finance operations -- but what about the rest of the GMAC?

I think this is a good move in the short term -- but once GM gets back on it's feet and get's their finances in order, I would wonder if it wouldn't be in GM's better interest to re-acquire a controlling stake in GMAC (which really just amounts to 2% of the company to begin with). As of this tranaction, they'll still be the single largest shareholder (which probably reasons as to why they'll continue to be the known as "GMAC" and not some other made up name like after GMAC's Commerical Holing Corp was sold off and redubbed "Capmark" since GM only owned 22% of the new company) -- but you still have to wonder if this will never again be a GM holding and they will just be content to keep their 49% stake?

Just thinking out loud. I think it's great for their balance sheets and great for their product development, both of which should help GM in the short term. But long term, what does everyone else think about this move?

[Globalist]

half of GMAC earning + 14 Bil + possibility to buyback the auto finance in 10 years. It's a good deal considering GM's actual cost to access capital.

[asim]

I like the diea of turnarounds, and they have to be funded someway...

[CaddyLover]

I'm glade to hear it, I hope this will help GM out.

[mikesright]

What you guys need to realize is that this was a good move. GM made a lot of much-needed money to fund a turnaround, plus it is able to take part in the growth of GMAC, which might give GM more money than it did under GM completely. This is a win-win. It provides much-needed cash to GM, while giving GM and GMAC a chance to get better returns. This also provides focus on what the company needs to do-make better cars and trucks. This in turn, will create even more growth at GMAC. Remember now, GMAC returns about $3 billion a year, and it was in danger of quickly losing value because of its inability to get more funding. It's better to toss out GMAC now because of the future. Besides, what good was GMAC going to do if in 2 years there was no GM?

[Globalist]

This is how I see this deal:

Gm is getting 2 Bil/year from GMAC
Assuming no earnings growth in the next years, it will take GMAC 7 years to return $14 Bil to GM.

With this deal, In the next 7 years GM will get at least $7 Bil (1 per year) + 14 = $21 Bil with a possibility to buyback the auto finance.

Obviously this simple calculation doesn't take into account any discount rate--just for simplification.

[2648562]

From everything I've heard GM had to sell it. It sounds like a smart move, but I'm still worried the sale is going to have a negative effect on earnings in years to come. I'm not going to lose any sleep over it though.

[joe1280]

14 bill....that should speed up the camaro development

[D C]

Originally Posted by nadepalma

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

Apparently Wall Street changed their minds. GM closed down over 5%

[mike's 01ws6]

Its good to see that GM is making wise use of the assets that are available.

[King Riffle]

They need money. I just can't help but think that GM's going to waste it.

[2648562]

Originally Posted by D C

Apparently Wall Street changed their minds. GM closed down over 5%

You mean GM is doing a bad job of getting their message across??? LOL, I can't believe it!

[jbartley]

Originally Posted by King Riffle

They need money. I just can't help but think that GM's going to waste it.

did you see 60 minutes? doesn't look wasted to me!