GM sells stake in GMAC

by 18 May 2006

General Motors has announced its intention to sell a 51 percent stake in its financing arm, General Motors Acceptance Corp (GMAC), to a consortium led by hedge fund Cerberus Capital Management LP for a total of $14 billion (Rs 62,000 crore).

The long-awaited sale will generate much-needed cash for the world’s largest automaker, which some analysts believe faces the possibility of bankruptcy after reporting a $10.5 billion (Rs 48,000 crore) loss in 2005.

The Cerberus-led investor group includes the private equity unit of Citigroup and Japan’s Aozora Bank, a portfolio company of Cerberus. Analysts said that the sale appeared “to radically reduce bankruptcy risk for GMAC by removing it from the controlled group of GM.

Other analysts, however, felt that the deal would not mitigate GM’s problems. They said that although the sale raised GM’s liquidity, it is the last valuable non-auto asset in the company’s portfolio. They felt that the sale could put a tremendous strain on GM’s earnings power.

GMAC, which provides automotive and commercial financing as well as mortgage and real-estate services, earned $2.8 billion (Rs 12,600 crore) in 2005 while its parent struggled badly amid rising costs and stepped up competition from Asian rivals. GM has sold different parts of GMAC’s business over the past year to help shore up its finances.

Rick Wagoner, GM chairman and chief executive, said in a statement that the deal provided significant liquidity to support the company’s North American turnaround plan, finance future growth initiatives, strengthen its balance sheet and fund other corporate priorities.

GM said it expects to receive the proceeds from the transaction over three years, including distributions from GMAC, with an estimated $10 billion (Rs 45,000 crore) by the time the deal closes. This includes $7.4 billion (Rs 33,300 crore) from the Cerberus-led consortium and an estimated $2.7 billion (12,150 crore) cash distribution from GMAC.

In December 2005, GMAC agreed to sell up to $20 billion (Rs 90,000 crore) in US retail automotive assets to Scotia Capital, the investment banking unit of Bank of Nova Scotia. In July 2005, Bank of America agreed to buy up to $55 billion (Rs 247,500 crore) in car loans from GMAC over five years. The GMAC board of directors will have 13 members — six appointed by the consortium, four by GM, and three independent members. GMAC will continue to be managed by its existing executive management led by chairman Eric Feldstein.

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