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June 01, 2005

Rumors that GM *Is* Going to Shovel Lots of Cash Out of the Enterprise

The question of why the auto companies aren't shoveling cash out of their enterprises is partially answered. Lee Hawkins reports:

Heard on the Street: Wall Street is betting that General Motors Corp. -- facing the twin issues of having its bonds rated 'junk' and Las Vegas billionaire Kirk Kerkorian's tender offer under way -- soon will undertake a more ambitious restructuring... GM's highly profitable finance arm, General Motors Acceptance Corp., which last year earned $2.9 billion, or about 80% of GM's total net income. GMAC's potential for growth was crimped when Standard & Poor's downgraded GM's credit ratings to junk status earlier this month.... Now, some analysts say selling all or part of GMAC would help GM raise more cash to pay for an overhaul of its money-losing North American auto business -- or a payout to shareholders -- while allowing GMAC to obtain an investment-grade debt rating that will allow it to grow....

Action in GM's shares suggests that investors are betting that something big will happen, but watching the debt situation warily....

Getting concessions from the UAW to close more plants and reduce GM's work force still might not be enough to make a significant difference, says Ron Tadross, an auto analyst at Banc of America. 'The UAW is no silver bullet here,' he said, since labor costs represent only about 20% of the cost equation for GM.... The core of GM's current problem isn't cash -- it is sitting on $54.9 billion -- but declining revenues per vehicle in North America, a reflection of slumping sales of large sport-utility vehicles and mediocre demand for many of GM's cars....

Some shareholders want more significant steps. 'I would hate to see them split off some of their best assets, but at the same time they need to take some strong action to save the company,' says Christopher Ailman, chief investment officer of the California State Teachers Retirement System, the third-largest public pension fund in the U.S. Some analysts caution that it wouldn't be a simple matter for GM to simply sell GMAC.... If Mr. Wagoner raised cash with a GMAC transaction, how would he spend the money? Some analysts have suggested GM could use the proceeds of a GMAC deal to fund employee-buyout plans.... [A]ny windfall from a GMAC deal also could be returned to shareholders. Mr. Kerkorian has in the past invested in companies and then pushed management to return more wealth to shareholders.... 'The benefit [of selling GMAC assets] would be really to GM shareholders as opposed to GM as an ongoing company,' says Brian Johnson, an auto analyst at Sanford C. Bernstein. 'It gets money in their pocket and forces GM to negotiate with the UAW without the GMAC piggybank in their pocket.'...

Posted by DeLong at June 1, 2005 01:31 PM