General Motors Corp., desperate for cash to pay for buyouts and plant closings as part of its North American restructuring, said Monday that it has agreed to sell a 51 percent stake in its finance arm in a deal expected to generate $14 billion for the world’s biggest automaker.
GM Chairman and Chief Executive Rick Wagoner said the sale would strengthen GM’s balance sheet as the automaker carries out its plans to recover from $10.6 billion in losses in 2005 and stem the loss of its U.S. market share to Asian competitors.
“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).”
But GM’s shares sank more than 3 percent after the announcement as analysts questioned weherher the cash infusion would have a lasting impact on GM’s outlook and major credit ratings agencies indicated the deal may not lead to an investment-grade rating for the finance arm.
The automaker has announced plans to cut 30,000 U.S. hourly jobs and close 12 plants by 2008. As part of that plan, it recently offered buyouts to 113,000 hourly workers. It also has agreed to bankroll early-retirement buyouts at Delphi Corp., its former parts division and major supplier. Up to 17,000 hourly workers at Delphi could be eligible for a $35,000 payment to retire. GM, Delphi and its unions also are negotiating a settlement on wage cuts that could cost GM up to $12 billion.
The company announced it intended to sell the stake in GMAC last fall, and analysts had predicted a 51 percent share would command between $11 and $15 billion. GM expects to receive about $14 billion over the next three years from the GMAC deal. The stake is being purchased by a consortium of investors led by Cerberus Capital Management LP, a private investment firm. The group also includes Citigroup Inc. and Aozora Bank Ltd. The sale is expected to be completed in the fourth quarter of 2006.
Morgan Stanley analyst Jonathan Steinmetz said GM appears to be hoarding cash so it can fund buyouts, offer cash to the United Auto Workers in exchange for benefit cuts or weather a future strike. But he said the company needs to provide more details on exactly how it plans to spend the money and why it’s worth the earnings power GM gets from GMAC. GMAC paid GM a $2.5 billion dividend last year.
“GM has shrunk or divested ‘good’ assets in the past to redeploy into its auto business or fund legacy liabilities, only to repeat the cycle a few years later,” Steinmetz said in a note to investors. He said investors should keep a close eye on whether GM can improve its U.S. market share — which is now below 25 percent — and control its legacy costs.
Wagoner pointed to recent achievements in cutting costs, including a deal with the UAW that requires retirees to shoulder more of their health care costs. That deal was approved Friday by a federal judge and is expected to save GM $1 billion annually after taxes. GM also recently sold a 17 percent share in Suzuki Motor Corp. for $2 billion and is exploring the sale of its 7.9 percent stake in Isuzu Motors Ltd.
“(GMAC) proceeds add to the already sizable cash balances at GM, which provides some comfort given the high cash burn rates we see at GM in coming years,” said Robert Barry, an auto analyst with Goldman Sachs.
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 could get another $4 billion over the next three years from about $20 billion of GMAC automotive lease and retail assets and associated funding that it plans to retain.
In addition to raising cash, GM also was seeking to restore GMAC’s debt ratings with the sale. GMAC’s ratings were pulled into junk territory last year as GM struggled with mounting losses. A rating below investment grade makes it harder and more expensive to borrow money.
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.
But ratings agencies took no immediate action on Monday’s announcement. 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-plus. That is still one notch below investment grade.
Moody’s Investors Service said the change in ownership won’t immediately affect GMAC’s Ba1 rating, the agency’s highest non-investment grade rating. Moody’s said problems at GM will continue to impact GMAC, and that it may even lower GMAC’s credit rating one notch.
Fitch Ratings placed GMAC on a watch with positive implications, but also warned that GM’s troubles could continue to hurt GMAC’s rating.
Himanshu Patel, an auto analyst with JPMorgan Chase & Co., said credit agencies should take comfort that GMAC’s new board isn’t GM-controlled. Cerberus will have six seats, while GM will have four and three will be independent. He also said GM is retaining existing leases, which carry the most risk if GM seeks bankruptcy protection.
“We think this deal will at least get a near investment-grade rating, with the potential for future ratings upgrades,” Patel said in a note to investors.
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 under certain conditions.
Speculation has arisen over Wagoner’s future with the company. GM’s board, 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.
The next big issue for GM is averting a strike at parts supplier Delphi which could shut down production at the automaker. On Friday, Delphi asked a bankruptcy judge to void its labor agreements, and the UAW said a strike would be inevitable if the judge agrees to it. A hearing is scheduled for May 9, but GM and Delphi have pledged to keep talking until then.
Wagoner said only that he was optimistic about prospects for a deal.