Autos: GM Offloads GMAC for $14 Billion
April 3, 2006 — -- General Motors has announced a $14 billion deal to sell a majority of its profitable GMAC finance unit to an investor group led by Cerberus Capital Management.
The deal was widely anticipated and was a key component of funding the aggressive restructuring plans developed by GM management.
"We've made some big moves, such as the health care agreement with the United Auto Workers union; the manufacturing capacity plan; changes to our salaried health care and pension plans; an accelerated attrition plan for hourly employees; and a complete overhaul of our marketing strategy," said GM CEO Rick Wagoner in a prepared statement. "These bold initiatives are designed to immediately improve our competitiveness and position GM for long-term success and today's transition is a further step in that direction."
The GMAC deal includes:
- $10 billion in cash on closing (at the end of this year) and an additional $4 billion in cash over three years.
- 10 year contracts guaranteeing GMAC will provide auto financing for GM dealers and customers.
- The option for GM to buy back the auto finance unit of GMAC within 10 years if the automaker gets investment grade credit ratings again.
- The need to get approval from various governments (U.S. and around the world). The deal is estimated to close at the end of the year.
Quite simply, GM desperately needs the cash to fund worker buyouts (called "general corporate purposes" in the literature being circulated this morning). The automaker announced generous (up to $145,000) buyout packages last week for its union workers and workers at former parts unit Delphi.
The world's largest automaker lost $10.6 billion thanks to a manufacturing operation faced with high costs bloated by generous health-care and pension benefits -- and much of that money was paid out to retirees who no longer work for the company. GM needs a way to quickly jettison the 15 percent of its operating capacity that sits idle at any time. Getting union workers out of the GM JOBS bank (where they receive wages even when they're not working), closing old plants, and slashing the ranks of management are all part of the plan.
Another challenge facing GM's financing unit: a junk credit rating. When Moody's and S&P downgraded the auto giant to below investment-grade status last year, the company's cost of borrowing money from the public markets went up tremendously. There is some hope that decoupling the profitable unit from its ailing parent will allow the rating agencies to recognize the viability of GMAC and raise its ratings fairly quickly. GM retains a 49 percent stake in GMAC and thus shares in the future profits of the company. Putting GMAC in a better financial position might help buoy GM.
What Is GMAC? According to Hoover's, GMAC is a massive global finance company with assets of nearly $300 billion and operations in about 700 offices in 41 countries. General Motors Acceptance Corp., a GM subsidiary, offers financing to auto dealers and their customers. Its subsidiaries include GMAC Insurance and GMAC Mortgage. GMAC also owns ditech.com, an online mortgage lender.
What Is Cerberus Capital Management? According to Hoover's, Cerberus Capital Management's investment strategy is to keep companies from flaming out, often by injecting capital into retail ventures. The company's holdings include a 49 percent stake in Japanese bank Aozora, U.S. tech firm SSA Global Technologies, and cable operator Galaxy Cable.
Some information in this report is from The Associated Press wire service.
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