General Motors (GM) sold a controlling stake in its finance arm to an investment consortium led by Cerberus Capital of the US yesterday for $7.4 billion (€6 billion), securing the car maker a cash inflow of $14 billion over the next three years.
GM Acceptance (GMAC), which provides car and commercial financing as well as mortgage and real estate services, earned $2.8 billion last year while its parent struggled badly amid rising costs and increased competition from Asian rivals.
The sale of 51 per cent of GMAC to Cerberus, Aozora, a Japanese bank it owns, and Citigroup's private equity arm will result in an extra $2.7 billion payment to the car maker as tax assets are released.
GM will also retain car lease and retail loans with a net book value of $4 billion, which it expects to realise over the next three years.
However, GM admitted that it had sold the stake at a loss because its own financial problems meant that it could not give GMAC the funding that it needed to expand.
The payment is equal to half the "tangible" book value, excluding goodwill on GMAC's balance sheet.
GM will take a non-cash charge of $1.1 billion to $1.3 billion to cover the loss.
"We felt economically, all things considered, this was a better transaction for us than alternatives, including keeping the business," said Fritz Henderson, chief financial officer, GM.
The structure of the deal, designed to insulate Cerberus as far as possible from the risk of a GM bankruptcy, also highlights concerns about GM's future.
GM is retaining about two-thirds of the retail lease assets, and the associated risk that second-hand GM cars fall in value if the car maker is forced out of business.
GM will invest $1.4 billion of the proceeds back into new preferred stock of GMAC, bolstering its capital. GMAC's unsecured exposure to GM will cut from about $14 billion - including a $4 billion undrawn credit line - to $400 million when the deal is completed, with a cap of $1.5 billion.
The deal is also conditional on securing a promise from the Pension Benefit Guaranty, the US pension rescue fund, that it would not try to claw back GMAC's assets if GM went bust.
The board of GM used the announcement to try to draw a line under speculation about the future of Rick Wagoner, chairman and chief executive.
George Fisher, senior independent director, said that the sale was "an important milestone" in its recovery plan, which involves 30,000 blue-collar job losses in North America and a dozen plant closures.
GM lost $10.6 billion last year and last week revealed accounting errors dating back to 2000, the year Mr Wagoner, a former chief financial officer, took over as chief executive.
The sale of GMAC was designed to secure the unit an investment grade credit rating to lower its borrowing costs, but the company said that it now hoped only to "delink" GMAC's rating from GM, which has junk bond status.
The deal, expected to be completed in the fourth quarter, is conditional on GM retaining at least a "CCC" credit rating, and on GMAC retaining its "BB" rating.
Philip Watkins, a credit analyst at Commerzbank Corporates & Markets, said that the would " radically reduce bankruptcy risk for GMAC by removing it from the controlled group of GM".
GM shares fell 2.8 per cent to $20.68, while bond spreads at GMAC, one of the world's biggest borrowers, tightened. - ( Financial Times service, Reuters)
:quality(70)/cloudfront-eu-central-1.images.arcpublishing.com/irishtimes/VR3765MFOBH2NMV2QNICYDF67M.png)