GMAC may be put up for sale

Move could bring GM up to $15 billion

October 18, 2005|By DETROIT FREE PRESS

DETROIT — If General Motors Corp. sells its life preserver - the profitable GMAC finance unit - will automotive operations sink or swim?

GM Chairman and Chief Executive Officer Rick Wagoner said yesterday that the company is exploring selling off all or part of General Motors Acceptance Corp. A wholly owned subsidiary of GM since 1919, GMAC sells automotive financing, commercial financing, insurance and mortgage products and real estate services.

Auto experts estimate GM could raise $10 billion to $15 billion by selling a controlling 51 percent stake in GMAC. What's more, a sale could improve GMAC's credit rating and free it from GM's junk, or speculative, rating. That should make it easier and less expensive to borrow the billions of dollars it needs every year for loans to consumers and businesses, and make it a healthier company.

"Over the long term, owning less of a very profitable enterprise returns you more than owning all of a business that is somewhat constrained," said GMAC spokeswoman Joanne Krell.

But what might happen to GM without GMAC, and its lucrative earnings, is a critical question for the automaker.

While the billions in cash it might raise would certainly make investors happy, especially if the sale results in an increased dividend, GMAC's profits helped offset losses at the carmaking operations.

Without GMAC, GM would have lost $2.2 billion more this year, on top of its $3.8 billion, for a grand total of $6 billion.

Peter Morici, a University of Maryland business professor who follows the automotive industry, said he doesn't believe GM can survive on automotive operations alone.

"Right now, as they're presently structured, they just can't make cars that ... people want to buy, at a price that they can cover their costs," Morici said. "They can't cover their costs at the price people are willing to pay for their cars, and this doesn't change it."

With GM's automotive operations in trouble, despite hot-selling vehicles such as the Chevrolet HHR and Hummer H3 SUVS, selling part of GMAC might be irresistible.

"Our sense is that a 51 percent sale could raise more than $11 billion, potentially improving GMAC's cost of funds," H. Peter Nesvold, an auto analyst with Bear Stearns in New York, wrote in a note to investors.

Some financial experts say GMAC has become more valuable than all of GM.

David Healy, an auto industry expert who advises clients of the brokerage Burnham Securities in New York, estimated that GMAC is worth more than $30 billion. That's a lot because, theoretically, all of GM's shares could be bought for about $17 billion.

GMAC earnings

While GM no longer feels comfortable telling investors how much it might earn, GMAC said it's still on track to earn more than $2.5 billion this year - an amount that will help buoy the carmaker's sinking bottom line in automotive operations.

GM's global automotive operations lost $3.8 billion for the first nine months of the year, and virtually all of it came from the North American automotive division.

GMAC, meanwhile, earned $2.2 billion during the same period, although those results are down about $11 million from last year.

Hurting GMAC

While GMAC's performance is helping GM, GM's poor results are hurting GMAC.

GM's speculative, or junk, credit rating is shared by GMAC, hampering the financing company's ability to raise money. A speculative rating means the company faces an adverse business climate that makes it more likely to default on loans .

The credit-rating agency Standard & Poor's said it might consider changing GMAC's overall credit rating if GM takes the right action with the financing arm.

"We view an investment-grade rating for GMAC as feasible, if GM sells a majority stake in GMAC to a highly rated financial institution with a long-range strategic commitment to the automotive finance sector," S&P wrote yesterday.

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