GM Releases Its Crown Jewel

Updated from 8:40 a.m. EDT

General Motors (GM) announced a long-awaited deal Monday to selloff a majority stake in GMAC, the finance subsidiary that has recently been the automaker's only profitable business, in return for $14 billion in cash over the next three years.

Despite its profitability, GMAC's credit ratings have suffered over the last year at the hands of its parent's dismal financial condition. Its sale has the potential to restore investment-grade ratings for the business and prevent spiraling borrowing costs from wiping out its profitability. But initial commentary circulated through the credit market suggests the buyer, a private equity consortium led by Cerberus Capital Management, may not be able to immediately improve GMAC's ratings.

For its part, GM unloaded its crown jewel out of a pressing need for cash as it juggles dwindling market share, a burgeoning cost structure, dicey consumer spending and heated bankruptcy proceedings at Delphi (DPHIQ), its largest auto parts supplier and former subsidiary. Even with its current cash cushion of around $30.1 billion, GM's willingness to sell the finance business reflects, in part, the potential for its reserves to be eaten up quickly should events take a turn for the worse.

"GM needs to liquefy its balance sheet in order to have the cash on hand to fund its pension problems, its facility close-down problems, its Delphi problems and all its other problems," says Paul H. Ross, managing director with ING Investment Management.

GM agreed to sell a 51% stake in GMAC in the deal, which is expected to close in the fourth quarter. GM will receive $7.4 billion in cash at that time, along with an estimated $2.7 billion cash distribution from GMAC. It will receive an additional $4 billion over the next three years related to the monetization of some assets over time and other adjustments. The company also will record a pretax charge related to the sale of $1.1 billion to $1.3 billion in the second quarter.

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