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The Honolulu Advertiser
Posted on: Tuesday, April 4, 2006

GM sees deal as way to boost balance sheet

By SARAH KARUSH
Associated Press

DETROIT General Motors Corp., desperate for cash to pay for employee buyouts and plant closings as part of its North American restructuring, said yesterday it has agreed to sell a 51 percent stake in its finance arm in a deal expected to generate $14 billion for the world's biggest automaker.

GM chairman and CEO Rick Wagoner said the sale would strengthen GM's balance sheet as the automaker carries out its plans to recover from $10.6 billion in losses in 2005 and stem the loss of its U.S. market share to Asian competitors.

"In the context of history, the last six months are going to prove to be pivotal," Wagoner said at a news conference. "This is about restructuring our business so we can be robustly profitable in the future, so we're not so balanced on a razor's edge (that) if gas prices go up, you don't make any money, if your sales go down 10 percent you don't make (any money)."

But GM's shares sank more than 5 percent after the announcement as analysts questioned whether the cash infusion would have a lasting impact on GM's outlook, and major credit-rating agencies indicated the deal may not lead to an investment-grade rating for the finance arm.

GM shares lost $1.13, or 5.3 percent, to close at $20.14 on the New York Stock Exchange.

The automaker has announced plans to cut 30,000 U.S. hourly jobs and close 12 plants by 2008. As part of that plan, it recently offered buyouts to 113,000 hourly workers. It also has agreed to bankroll early-retirement buyouts at Delphi Corp., its former parts division and major supplier. Up to 17,000 hourly workers at Delphi could each be eligible for a $35,000 payment to retire. GM, Delphi and its unions also are negotiating wage cuts that could cost GM up to $12 billion.

The company announced it intended to sell the stake in GMAC last fall, and analysts had predicted a 51 percent share would command $11 billion to $15 billion. GM expects to receive about $14 billion over the next three years from the GMAC deal. The stake is being purchased by a consortium of investors led by Cerberus Capital Management LP, a private investment firm. The group also includes Citigroup Inc. and Aozora Bank Ltd. The sale is expected to be completed in the fourth quarter of 2006.

Morgan Stanley analyst Jonathan Steinmetz said GM appears to be hoarding cash so it can fund buyouts, offer cash to the United Auto Workers in exchange for benefit cuts or weather a future strike. But he said the company needs to provide more details on exactly how it plans to spend the money, and why it's worth the earnings power GM gets from GMAC. GMAC paid GM a $2.5 billion dividend last year.

"GM has shrunk or divested 'good' assets in the past to redeploy into its auto business or fund legacy liabilities, only to repeat the cycle a few years later," Steinmetz said in a note to investors.

He said investors should keep a close eye on whether GM can improve its U.S. market share which is now below 25 percent and control its legacy costs.