Ailing GM sells 51% of GMAC

Automaker's board gives pressed CEO a vote of confidence


G. Richard Wagoner Jr., the chairman and chief executive of ailing General Motors Corp., received a public vote of confidence from the board of directors on the day GM announced the next step in what it hopes is the road to recovery: The long-talked about sale of a majority stake in its GMAC financing subsidiary for $14 billion.

"While there is still much work to be done, the GM board has great confidence in Rick Wagoner, his management team and the plan they are implementing to restore the company to profitability," director George M. C. Fisher said yesterday in a statement on behalf of the board.

Wagoner responded: "I appreciate support from the board, workers, even my wife, whoever I can get it from these days."

While Wagoner joked, speculation has grown that the board may be a bit eager for him to step up the recovery or lose the job to someone who will.

"Wagoner has been very resilient in all of this, but the tenure of any CEO in this country isn't very long and the clock has to be running out," said Diane Swonk, chief economist with Mesirow Financial Inc. in Chicago.

Wagoner warned critics, however, that his priority isn't speed.

"We're taking unprecedented, historical actions such as in health care and relations with the UAW, not just to be profitable for a quarter or two, but to restructure the business to be robustly profitable in the future for the long term," he said.

The GMAC sale will be to a consortium led by Cerberus Capital Management LP, a private investment firm, along with Citigroup Inc. and Japan's Aozora Bank Ltd.

The deal will not only give GM an infusion of cash to help finance its recovery. It also has allowed Wagoner to raise his original cost-cutting estimate for this year to $7 billion from $6 billion.

He said the next step would be to resolve the problems at Delphi Corp., GM's major parts supplier now in Chapter 11. On Friday Delphi asked a bankruptcy judge to void its labor agreements with the United Auto Workers, which said a strike would be inevitable if that happens. A strike could shut GM down.

Moments after Wagoner's news conference yesterday, Robert S. "Steve" Miller Jr., Delphi's chairman and chief executive, said the auto parts supplier would be able to avoid a strike.

"We are determined to work this out and that emerging from bankruptcy protection in the first half of 2007 is a realistic target," Miller said after an address to the Detroit Economic Club.

GM, which lost $10.6 billion in 2005, also has been trying to cut its own labor, pension and health-care costs, and the GMAC sale will provide money needed to finance those moves.

As important, it will separate GMAC from GM in an attempt to win back investment-grade credit ratings for the financing unit.

The credit ratings services were guarded about the deal. Moody's, Standard & Poor's and Fitch all left GMAC below investment grade.

"The fact [that] credit rating agencies haven't changed their ratings is no surprise," said George Magliano, automotive research director for Global Insight. "I wouldn't have expected them to right away and it will take some time, but it now is more logical that credit ratings should go up rather than down."

Eric Feldstein, who will remain chairman and CEO of GMAC after the sale, said he expects such an upgrade "at the close of the sale, or shortly after."

Burnham Securities analyst Dave Healy said such a delay isn't unusual given that credit agency ratings are six to 18 months behind the news.

GMAC's credit rating, along with that of its parent, was cut to junk last year by the three ratings services as the automaker lost $10.6 billion. GMAC has carried higher ratings than GM since late last year on the expectation of a sale.

The sale is expected to be completed in the fourth quarter of this year. It follows the sale last month of a 78 percent interest in GMAC Commercial Holding Corp., its mortgage operations, for $1.5 billion. "General Motors just found a way to put money in what I call its peace chest, money that it can use to pay off the concessions it has made and will make to the UAW to avoid a strike," said Magliano.

"With the $14 billion they'll get from the sale they now don't have to touch their $20 billion they have in liquidity. If they had to use the $20 billion to fund the concessions they would have had a liquidity crisis."

But there is a downside to going from 100 percent to 49 percent ownership. "If GMAC reports $2.8 billion in earnings, in the future, only $1.4 billion will be on GM's income statement," noted Healy.

GMAC finances more than 50 percent of all loans to buyers of GM vehicles. GM said the agreement won't affect that.

As part of the deal, GM and the Cerberus group will enter into a series of 10-year agreements that assure GMAC will continue to finance GM vehicle sales. The agreement also gives GM the option to buy back GMAC within 10 years of the sale if it has an investment-grade credit rating and meets other criteria.

GMAC's profit reached a record $2.9 billion in 2004, but fell to $2.3 billion in 2005 as those poor credit ratings pushed up the costs for the financing company to borrow money.

The 87-year-old finance unit, with total assets of about $321 billion, got $666 million of its net income in 2005 from auto financing, $1.31 billion from mortgages and $417 million from insurance, according to recent filings with the Securities and Exchange Commission.

Jim Mateja writes for the Chicago Tribune.

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