General Motors Corp. yesterday said it hopes to sell a controlling stake in its highly profitable finance arm, General Motors Acceptance Corp., which provides everything from car loans to home mortgages.
Analysts said a sale of over 50 percent of GMAC could raise more than $10 billion, enough cash to help keep the ailing auto giant out of bankruptcy court while it restructures. But analysts and GM investors also warned that any deal to sell control of GMAC would also come with enormous risk, diverting a huge and consistent earnings stream away from GM's precarious balance sheet.
"This clearly means GM is saying it's going to be in the auto business, not the finance business, and that they are building a war chest to turn this thing around," said Dan Genter, chief executive and chief investment officer of RNC Genter Capital Management LLC, a Los Angeles investment firm that owns short-term GM bonds. Genter added that GM was "selling the crown jewel, or at least a controlling interest in the crown jewel, of the company."
GMAC has bailed out its parent during many recent earnings seasons. In the third quarter of this year, for instance, GM's North American division posted a net loss of $1.6 billion, which would have been worse without GMAC's earnings of $675 million. In 2004, GMAC earned $2.9 billion, 80 percent of GM's profit. GMAC has said it expects to earn $2.5 billion this year.
But as GM has struggled with declining North American sales and soaring labor costs, its thriving finance arm has suffered along with it. Bond ratings agencies have downgraded debt issued by both GM and GMAC to junk status, despite GMAC's strong performance. GM executives yesterday said they hoped that selling a controlling stake in GMAC would encourage ratings agencies to upgrade GMAC's bonds, giving the unit access to cheaper capital.
"This is, we think, a move that is consistent with our strategy of maintaining the synergy between GM and GMAC and at the same time really increasing their ability to grow their business," GM chief executive G. Richard Wagoner Jr. said on a conference call.
Scott Sprinzen, an automotive analyst at debt rating agency Standard & Poor's, which rates GMAC's bonds at BB, one step higher than GM's but still not investment grade, issued a cautious endorsement of Wagoner's plan.
"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," Sprinzen wrote in a research note yesterday.
Several analysts interpreted Sprinzen's remarks to mean that S&P would prefer a large financial firm, such as Citigroup Inc. or Bank of America Corp., or a conglomerate with a large finance arm, such as General Electric Co., to buy control of GMAC. Some analysts also said a group of large private equity firms could combine on a bid for control of the finance unit.
The sale of a controlling stake in GMAC would have no direct impact on GM's bond ratings. But analysts said the infusion of cash could improve GM's balance sheet enough to reduce the risk of a bankruptcy filing, eventually help to lifting the company's bonds out of junk status.
Any deal for GMAC is expected to take months to negotiate. Analysts and GM investors said the deal would be designed to guarantee that GMAC continues to boost GM's bottom line by helping increase auto sales while also insulating GMAC from GM's liabilities, such as contract demands from unions or claims by the federal Pension Benefit Guaranty Corp.
In addition to raising cash to avoid bankruptcy, analysts said, the sale of a controlling stake in GMAC could strengthen the company's hand in dealing with its unions by putting a massive cash generating asset out of reach of labor's demands. "The blessing of GMAC comes in GM's ability to stay the course and to take a beating in the market while knowing that the GMAC ATM machine is there," Glenn Reynolds, analyst at corporate debt rating firm CreditSights Ltd., wrote in a research note. "It is a curse in terms of GM's ability to plead poverty to the UAW."
A GMAC sale could also allow GM to send out a big dividend payment to quiet restive shareholders, chiefly billionaire investor Kirk Kerkorian, who now controls 9.9 percent of GM's stock. A spokeswoman for Kerkorian's investment company, Tracinda Corp., did not return a call for comment on the proposed GMAC sale.