GM Completes Majority Sale of GMAC; Kerkorian Sells Stake

GMAC Sale Complete

General Motors (GM) has completed the sale of 51% of its finance arm, General Motors Acceptance Corp (GMAC) to a group of investors led by Cerberus Capital management. The sale is worth US$14 billion over the next three years, with US$7.4 billion in cash and US$2.7 billion in distribution being received this year and US$4 billion over the next three. "Successfully completing the GMAC transaction has been a key priority for the company, and an important step to further support GM's turnaround," GM chief executive Rick Wagoner said in a press release. "This transaction will result in a stronger GMAC, with enhanced access to funding at lower costs and greater opportunities for growth, including leveraging their traditionally strong relationships with GM dealers."

Kerkorian Exits

The sale coincided with GM's largest individual shareholder and vocal critic of the current turnaround strategy, Kirk Kerkorian, selling his remaining shares in the company, ending a 20-month effort to shape the fortunes of the world largest automaker. The sale of GMAC offset another possible run on GM's shares, which finished just 0.9% down on the day's trading at just under US$30. Last December a similar move by Kerkorian to sell off GM shares for tax purposes saw GM's share price dip to a low of US$18 in December 2005.

GMAC Ratings Boost

Standard & Poor's (S&P) ratings agency increased GMAC's credit rating to BB+, one step below investment grade, from BB. The New York-based ratings company also said it upgraded GMAC's Residential Capital home-mortgage subsidiary to BBB from BBB-. Fitch yesterday (30 November) upgraded GMAC to BB+, matching the S&P rating. Moody's rates the new GMAC Ba1, one step below investment grade.

GMAC Growth Strategy: Acquisitions

The reorganised GMAC will have a 13-member board controlled by the Cerberus consortium. It includes Wagoner, GM chief financial officer (CFO) Fritz Henderson, North American marketing boss Mark LaNeve and treasurer Walter Borst. GMAC's existing management team will remain in place. The company is led by CEO Eric Feldstein, president William Muir, and CFO Sanjiv Khattri. Feldstein said the new finance company, GMAC LLC, will look to expand, possibly through acquisitions, as soon as next year. "We are open to acquisitions [in the mortgage business]," Feldstein said. "2007 could be the year." Feldstein added that the company is open to acquisitions in the auto-finance arena as well as expanding its role in financing non-GM cars. Feldstein pointed out that although the current housing slump in the United States translates into weaker profit margins, "we stand to gain as some of the weaker players fall out". However, he added that the company will only act "if we think there's something of reasonable size that won't strain our capital position."

GM to Pursue Further Cost Cuts

Additionally, CEO Rick Wagoner said, in an interview published in Business Week, that GM will look to further cut costs in product development through consolidation and seek further concessions from the United Auto Workers (UAW) union. Wagoner said: "I don't think you can say the business is fixed, particularly in North America... We have a lot more work to do." Wagoner said he was looking to further cuts in the coming year on a par with the US$9 billion it cut this year through a programme of job cuts and plant closures. One area of potential conflict will be the UAW 2007 contract negotiations. UAW president Ron Gettelfinger has said he intends to fight to keep healthcare benefits for active union members and retirees, a key reason GM cannot be competitive with its rivals. Wagoner said "I don't think the problem with health care was created over the past two years... We don't expect it to be fixed over two years." Business Week also quoted CFO Fritz Henderson as saying that the company's cost-cutting efforts to date had taken it "a little more than halfway" toward Wagoner's target of cutting structural costs from 34% of revenue to 25%.

Outlook and Implications

With the sale of GMAC complete, adding to GM's already considerable cash reserves and Kerkorian seemingly having given up on trying to influence the company's fortunes, Wagoner and the GM board can concentrate on moving the current turnaround strategy in to the next phase.

The cash will be needed as well. With negative cash outflow forecast for next year, an estimated US$6-7.5 billion expected to be spent on the restructuring at Delphi and the cost of plant closures and 34,000 employee buyouts, GM will need all the cash it can get its hands on.

Seeking further concessions from the beleaguered UAW will cause the automaker to come head-to-head with its workforce again. If GM is to ever become competitive with the competition, it must achieve a comparable cost structure, but success in this arena is far from assured.

Furthermore, the GMAC sale will reduce the percentage of its profits boosted by the finance arm. GM has made more profit from financing operations than from its carmaking business since 2002, relying almost entirely on GMAC's profits for positive results in recent years. GM's profit potential is undoubtedly weakened by the sale. Additionally it increases GM's exposure to the vagaries of the economy and the company's future is ever more reliant on turning around its car manufacturing business, which is not guaranteed despite the current forward momentum. GM will be hoping the current slowdown in the U.S. economy does not gather pace in 2007, or it could have serious implications for the current strategy, and GM is running out of assets to sell.