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GMAC: Is GM Selling Its Seed Corn?


Is General Motors's decision to sell a 51% stake in its GMAC lending arm to a consortium of investors the boost it needs -- or is it just the carmaker's latest desperate move?

The fact is that GM (GM) may not have had a choice. It needs to raise cash, and General Motors Acceptance Corp. is the only asset it can sell without further damaging its core business. While GM was losing $10.6 billion in a year, credit-rating agency Standard & Poor's dropped the carmaker's credit rating to B, deep in junk territory. GMAC is in junk as well, but it's BB. If it dropped to B, the finance firm would be able to raise unsecured debt, says one investment banker who worked on the deal.

PROBLEM SOLVER? But any way you look at it, this is a must-do deal. The obvious point is that GM needs the $14 billion ($10 billion at close later this year and $4 billion over the next three years) to solve its own labor and cost issues. GM Chairman and CEO G. Richard Wagoner Jr. called the deal "another milestone" in bringing the company back to profitability.

But how will Wagoner prevent that "milestone" from turning into a millstone?

One of the primary criticisms of the deal is that GM will now be sharing half of GMAC's profits with the consortium of investors led by Cerberus Capital Management, a private investment firm, and its partners Citigroup. (C) and Aozora Bank. The sale is expected to be completed in the fourth quarter. GMAC made near-record earnings in 2005 of $2.9 billion, giving GM a dividend of $2.5 billion.

Wall Street is skeptical of the sale. Morgan Stanley analyst Jonathan Steinmetz wrote: "GM is giving away a lot of earnings power to achieve liquidity." Analysts held their enthusiasm, wanting to know how the money will be spent. After the deal was announced, GM's stock dropped 5%, to $20.14.

STEEP PRICE. Wagoner's hope is that by spinning off GMAC, its credit rating will be separate from GM's and begin to rise. With a better rating, GMAC could start to grow again. Eventually, its growth could offset the fact that GM is giving up 51% of GMAC's earnings to its new joint owners. But Wagoner concedes, "It'll take a while to offset the 51% earnings from GMAC."

With the auto business now tasked with carrying more of the load, Wagoner -- whose board just issued a public vote of confidence in him -- will need cash to fix it quickly.

GM's deal to bail out Delphi will carry a big price tag. Sanford C. Bernstein analyst Brian Johnson estimates GM will pay $4 billion in buyouts and to subsidize wages of the remaining union workers at Delphi. If GM, Delphi, and the United Auto Workers can forge a deal before a strike, Delphi could close plants and pay a lower wage from its own coffers. Union

workers wouldn't lose out because GM would make up the difference.

DELPHI DEBIT. Johnson says GM also needs to hold aside another $5 billion for long-term retiree obligations for the Delphi workers it will take back into its plants or pension plan. That's about $9 billion just for Delphi-related issues.

A GM spokesman also says that the company will spend some of its newfound war chest on new product and marketing initiatives. GM did increase capital expenditures by almost $1 billion, to $7.9 billion, last year and plans to hike it again, to $8.4 billion. That should mean more cash for new cars.

Given that GM already has $20 billion in cash, you'd think the GMAC deal gives it plenty of liquidity to breathe easily. But a Delphi strike could burn through that in four months, analysts say.

The bottom line: Selling 51% of GMAC will pay for Wagoner's restructuring moves. But he'll still need to keep plenty on hand for rainy days to come.


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