Cerberus, Citibank to buy GMAC

Detroit, Michigan-based General Motors, the world’s largest automaker, will sell a majority of its General Motors Acceptance Corp. (GMAC) unit to a consortium led by Cerberus Capital Management and the private equity unit of Citigroup for $14 billion.

GMAC is the financing arm of the struggling automaker, providing all of the financing for both leased and sold GM vehicles.

The deal, which will result in upfront cash proceeds of about $10 billion for General Motors as well as an additional $4 billion cash over the next three years, ends a five-month bidding war for GMAC that began when GM announced in October that it was seeking to sell a majority interest in the unit in order to restore the financing unit’s credit rating.

An investor group led by Kohlberg Kravis Roberts had also been actively pursuing the deal, but the Cerberus consortium emerged as the leader after months of complicated negotiations. At issue was how much control GM would retain over GMAC and what the board representation would look like, a source close to the deal said.

In the end, GM settled on a 13-member board; six appointed by the Cerberus-led group, four appointed by GM and three independent members.

A clear distinction between the two companies is important because GM hoped the separation would allow GMAC to have a credit rating not linked to that of GM. The credit rating of both GM and GMAC was cut to junk status last year after the automaker lost $10.6 billion. Analysts have said the only way for GMAC to regain an investment-grade rating would be to separate from GM.

Upon closing, Cereberus will have effective control of GMAC, with GM retaining 49 percent ownership. GM will retain a significant portion of GMAC’s existing US auto lease and retail assets, totaling around $20 billion.

However it remains to be seen whether the deal will change GMAC’s rating significantly. Moody’s Investors Service said today it will keep GMAC’s junk bond rating and may even downgrade it further. Moody’s said it believes the best-case rating outcome for GMAC would be to stick with its current Ba1 rating, one notch below investment grade.

Fitch Ratings was more upbeat, raising their rating for GMAC from “evolving” to “positive”. Fitch cited the deal’s removal of legal risks for GMAC should GM’s fortunes tumble further as well as the fact that GMAC is now free to pursue business unrelated to GM as positive signs. At the same time, Fitch warned that GM is still GMAC’s largest customer and any trouble at GM will still spell trouble for GMAC.

The level of concern over this possibility was underscored by a condition of the deal requiring an agreement from the Pension Benefit Guarantee Corp that the US pension rescue fund would go after GMAC if GM was forced into bankruptcy.

The deal also specifies that Cerberus will have a minimum hold period of five years.

Two weeks ago GM sold 78 percent of GMAC Commercial Holding Corp, the commercial mortgage division of the unit, to an investor group composed of Kohlberg Kravis Roberts, Goldman Sachs and Five Mile Capital for almost $9 billion. GMAC continues to hold a 21 percent stake in that business, which was renamed Capmark after the deal closed.