GM sells finance stake, board supports Wagoner
Carmaker to get up to $14 billion by selling majority of its finance arm to a consortium; unusual statement in support of CEO.
By Chris Isidore, senior writer

NEW YORK ( - General Motors finally announced an agreement Monday to sell a majority stake in GMAC in a deal meant to raise cash and let its profitable finance subsidiary shed its junk bond status.

The deal will bring troubled GM (Research) about $14 billion over time, including the $7.4 billion purchase price and a $2.7 billion distribution from GMAC itself. The buyer is a group led by a hedge fund called Cerberus Capital Management and the private equity arm of Citigroup (Research).

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Filing reveals details of accounting deficiencies at finance subsidiary in which embattled company is trying to sell stake. (more)
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GM is also hanging onto loans that GMAC has in its portfolio, which it expects to turn into another $4 billion over the next three years. GM will probably use proceeds to pay for some of the restructuring costs it will incur as it offers buyouts and retirement incentives to union workers and closes assembly plants.

GM shares sank about 3 percent in midday trading.

In announcing the deal, the GM board also gave embattled Chairman and CEO Rick Wagoner an unusual vote of confidence.

Last year's $10.6 billion loss and a more recent drumbeat of bad news -- including a threatened strike at Delphi (Research), GM's largest supplier, a restatement of results and a criminal probe of accounting practices, not to mention ongoing losses in market share -- have raised questions recently about how long Wagoner can hang onto his job.

"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," the presiding director of GM's board, George Fisher, said in a statement. Fisher, the retired chairman and CEO of Eastman Kodak, has been a GM board member since 1996.

At a news conference Monday morning, Wagoner said that in view of the speculation recently about whether he should be replaced, the board felt the statement was appropriate at this time.

"I appreciate it. I appreciate the support I get from the board, the workers, my wife, anywhere I can get it from these days," he said.

Asked whether the board had set specific performance targets for a return to profitability, Wagoner said management and the board regularly review plans, strategies and progress at the company, then added, "People aren't checking numbers in a particular month and saying, 'Ah ah, you're gone'!"

David Cole, chairman of the Center for Automotive Research, said that despite the problems at GM, Wagoner still has relatively good support from the GM board and even many of its major investors.

"He's under pressure, but more from outside than inside," said Cole.

Cole said even Jerry York, an adviser to GM investor Kirk Kerkorian who was recently added to the board after giving a speech saying GM management needed to be in crisis mode, appreciated the progress Wagoner is making.

"People like Jerry York are not patient people but they're smart people," said Cole. "Many people have misinterpreted as slowness a very difficult challenge. They're working very well with the unions, making significant progress. You don't want to blow that up now."

A spokesman for Kerkorian did not return calls seeking comment.

Wagoner did take time Monday to praise the leadership of the United Auto Workers union for its "mature and thoughtful approach," even though the union leadership Friday threatened a long strike at Delphi after the parts maker asked the judge overseeing its bankruptcy proceedings to throw out its labor contracts.

"The next big issue for us is to finalize the Delphi situation," said Wagoner. "When we work with the union rather than fight with them, it's better."

Junk status to continue

Currently one of the few money-making businesses at General Motors, GMAC's credit got cut to junk status last year when GM's (Research) own debt was downgraded due to huge losses at its core automotive operations, coupled with the company's looming retiree health care costs.

GM's loss last year, its worst since 1992, came despite a $2.5 billion cash dividend it received from GMAC. With GM giving no time frame for a return to profitability for its auto operations, the sale of a controlling stake in GMAC was seen as the quickest way to again give the finance unit access to lower-cost capital.

But a return to an investment-grade credit rating for GMAC won't happen immediately despite the deal.

Standard & Poor's, the nation's leading rating agency, said it expected to raise GMAC's credit rating one notch to BB+ after the deal closes, but that's still a notch below investment grade.

Bob Schulz, the top auto credit analyst at S&P, said last week that a return to investment grade status for GMAC would have taken a sale to a single, highly rated bank or finance company, rather than to a consortium.

S&P also said the GMAC deal poses risks as well as rewards for the parent company, though it cited the threat of a strike at Delphi, not the GMAC deal, as the most pressing problem for GM's credit rating. It added that it was keeping a watch on GM, meaning further downgrades were possible.

"GM should benefit from near-term stability of funding support for its automotive business if, as is expected, GMAC's funding costs improve," the agency said. "Still, in the long term, GM could face the risk that GMAC's new owners would seek to reduce funding support for GM's automotive business. The potential for future divisiveness among GMAC's owners for economic or business reasons also poses risks."

Lower bond ratings make it more expensive for companies like GM and GMAC to raise funds, since the lenders who buy the companies' bonds demand higher rates for the increased risk of default.

GM and GMAC officials said Monday that the automaker and GMAC have entered into a series of 10-year agreements to make sure that GM continues to get the funding it needs from GMAC for its auto business. And officials from GMAC and Cerberus said that despite reservations of the credit rating agencies, they're confident GMAC would be returned to investment grade "soon after" the deal closes.

"Some may want to see the new company seasoned a bit," said GMAC Chairman Eric Feldstein. "Generally we're pleased with the feedback from the agencies."

"We're confident we're on the glide path to investment grade," said Cerberus Chief Operating Officer Mark Neporent.

The junk bond status significantly raised the costs for GMAC to raise capital. The company's 2005 statement said it paid 4.8 to 5.4 percentage points above comparable Treasury securities on its debt, versus 1.7 to 2.7 points above in 2004.

While GMAC got its start financing auto purchases for GM customers, that's now a minority of its business. In 2005 GMAC got 62 percent of its income from its mortgage and insurance units, before a special charge. The other 38 percent came from it's finance division, including auto loans.

A broad looks at the problems facing GM: click hereTop of page

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