GM to Sell GMAC Stake for $14B

NEW YORK – General Motors Corp. (GM) Monday said it agreed to sell a 51 percent stake in its financing arm, General Motors Acceptance Corp., to a consortium led by hedge fund Cerberus Capital Management LP in a deal worth $14 billion.

The long-awaited sale would 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 loss in 2005.

The investor group includes the largest U.S. bank, Citigroup (C), and Japan's Aozora Bank Ltd., in which Cerberus holds a majority stake.

GM also said Citigroup will arrange two syndicated asset-based funding facilities totaling $25 billion to support GMAC's ongoing business. Citigroup has committed $12.5 billion to this funding.

The automaker cautioned that the Cerberus-led group can back out of the deal if GM's credit rating falls below "CCC." Moody's Investors Service rates GM "B3," one step above the triple-C category.

Detroit-based GM said it hopes the sale will help to restore GMAC's own credit rating to investment-grade status.

However, ratings agencies said they were doubtful the deal could accomplish that goal and shares of GM were down nearly 5 percent in afternoon trading.

Meanwhile, GM bonds edged higher on the decreased probability of default now that GMAC will have separate majority owners.

Analysts said they welcomed the distance being created between GM and its financing arm.

In a note to clients, Philip Watkins, a credit analyst at Commerzbank Corporates and Markets, said the deal appears "to radically reduce bankruptcy risk for GMAC by removing it from the controlled group of GM ..."

Shelly Lombard, analyst at research service Gimme Credit, said: "This is exactly what they needed to be delinked from GM. Their borrowing costs have got to be better — they've got to be."

How the Deal Stacks Up

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 at closing.

The total amount at that time includes $7.4 billion from the Cerberus-led consortium and an estimated $2.7 billion cash distribution from GMAC.

Further, GM will retain GMAC assets and associated funding with a book value of $4 billion that will monetize over three years.

GM said it will take a non-cash, pre-tax charge against earnings of $1.1 billion to $1.3 billion in the second quarter of 2006. It expects the deal to close in the fourth quarter of 2006.

The automaker will also have an option for 10 years to acquire GMAC's global automotive finance operations, under certain conditions, including if GM can boost its debt rating to investment-grade.

GMAC, which provides automotive and commercial financing as well as mortgage and real-estate services, earned $2.8 billion last year while its parent struggled amid rising costs and stepped up competition from Asian rivals.

GM Chairman and Chief Executive Rick Wagoner said in a statement that the deal "provides significant liquidity to support our North American turnaround plan, finance future GM growth initiatives, strengthen our balance sheet and fund other corporate priorities."

GM has sold different parts of GMAC's business over the past year to help shore up its finances.

On March 23, a consortium of Kohlberg Kravis Roberts, Five Mile Capital Partners LLC and Goldman Sachs Capital Partners bought 78 percent of GMAC's commercial mortgage unit, GMAC Commercial Holding Corp., for $1.5 billion and assumed $7.3 billion in debt owed to GMAC.

In July 2005, Bank of America Corp. agreed to buy up to $55 billion in car loans from GMAC over five years.

Last December, GMAC agreed to sell up to $20 billion in U.S. retail automotive assets to Scotia Capital, the investment banking unit of Bank of Nova Scotia .

Gates of Hell

The new 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 team led by Chairman Eric Feldstein.

The Cerberus consortium was advised by Citigroup on the deal, while advisers to GM and GMAC included Goldman Sachs and Morgan Stanley.

Cerberus made its name as a distressed asset buyer and has grown to become one of the largest hedge fund traders and buyout firms in the world. Fittingly, it took its name from the three-headed watchdog in Greek mythology that guards the gates of hell.

Former U.S. Vice President Dan Quayle chairs Cerberus Global Investments, a unit of the New York-based firm.

On Monday, GMAC's 8 percent bonds due in 2031 rose to 96.25 cents on the dollar, up from 94.75 cents Friday, according to MarketAxess.

"For GMAC bondholders, they can wipe their brows — for the most part they're out of the woods," said Gimme Credit's Lombard.

Lombard said even if GMAC doesn't get investment grade status, "this is still a great thing for GMAC bondholders."

Moody's Investors Service said "Ba1," the highest junk ranking," is likely to be the "best-case rating outcome" for GMAC.

Standard & Poor's said GMAC's rating is expected to be raised to "BB-plus," also one level below investment grade, if the deal is completed as proposed.

Shares of GM were off $1.03 at $20.24 on the New York Stock Exchange.