Carlyle to Buy GM Transmission Unit
Friday, June 29, 2007
General Motors said yesterday that it planned to sell its Allison Transmission commercial and military truck business to the Carlyle Group of the District and Onex. for $5.6 billion.
The proposed sale is the latest example of a cash-strapped automaker selling off a big piece of itself to a private-equity firm.
Allison, which dominates the market for automatic transmissions for delivery vehicles, work trucks and school buses, had about $2 billion in revenue last year and employs 3,400 people. The deal includes seven manufacturing plants, most of which are in Indiana.
According to the terms of the deal, GM would keep an Allison plant at White Marsh, near Baltimore, which builds transmissions for pickup trucks and sport-utility vehicles, and gas-electric hybrid systems for trucks.
GM shares closed yesterday at $38.15, up 74 cents. The stock reached a two-year high during trading.
GM Chairman G. Richard Wagoner Jr. said the deal shores up GM's liquidity, providing money the automaker needs to support new products and technology investments. But analysts said GM may be stockpiling cash that the automaker might give to the United Auto Workers in exchange for an agreement to limit GM's responsibility for future medical costs for retirees.
Last year, GM sold a 51 percent stake in GMAC, its finance unit, to a group of investment firms led by Cerberus Capital Management for $14 billion. In May, Cerberus agreed to buy Chrysler, Detroit's third-largest automaker, from DaimlerChrysler. In 2005, Carlyle and other investors bought Hertz, the rental-car company, from Ford and have since sold Hertz shares on the open market.
Ford, which like GM is losing money, is also considering strategic options, including the sale of its Jaguar and Land Rover luxury brands. In March, Ford sold its Aston-Martin brand to a consortium of private-equity investors.
Carlyle Managing Director Gregory S. Ledford, who led the purchase of Allison, said in a statement that Carlyle planned to expand the business and "support its transition to a stand-alone company."
Carlyle's holdings include a wide range of U.S. business, including Dunkin' Donuts and oil pipeline operator Kinder Morgan. The private-equity firm has about $58.5 billion under management. Onex, a private group in Toronto, has about $9 billion under management.
Detroit automakers are preparing for contract talks with the UAW that they consider watershed negotiations given the poor financial condition of the companies. GM and Ford have expressed interest in a health-care trust model adopted last year by Goodyear Tire & Rubber and the United Steelworkers of America, in which Goodyear agreed to pay the union a lump sum that the union invested and used to pay medical costs for workers.
"The health-care and the legacy costs are the major structural problems facing the auto industry at this point," said Pete Hastings, a bond analyst at Morgan Keegan. "As a bondholder, we would think it would strengthen the outlook of GM's bonds."
Analysts at Deutsche Bank, in a research report yesterday, said they believe that GM is raising cash to seek ways to restructure legacy obligations in contract talks. Detroit officials complain that U.S. auto companies are at a competitive disadvantage against foreign manufacturers who build cars in this country without the baggage of steep health-care costs.
GM estimates its health-care liabilities at $64 billion.
Although analysts have been pushing the lump-sum concept, UAW President Ronald A. Gettelfinger has been mum so far. Other UAW officials have noted the staggering payments that GM would have to make to win the union's acceptance.