Buyout, Sell-Off May Turn GM’s Fortunes

03/24/2006

Getting Rid of GMAC Stake Is Latest Attempt to Solve Automaker’s Problems

By Sholnn Freeman
Washington Post Staff Writer
Friday, March 24, 2006

General Motors Corp. chairman and chief executive Rick Wagoner has spent the better part of the past year doling out the bitter medicine that many say GM needs to get its moribund operations up and moving. Now, after several bleak months, a few voices in the industry are beginning to see in GM the faint hints of a turnaround.

Yesterday, GM said it has reached a deal with a private investment group to sell off a 78 percent stake in the corporate mortgage unit of its GMAC financing subsidiary, bringing in $8.8 billion of needed cash.

GM wants to sell the rest of the unit so GMAC’s credit rating will no longer be tied to GM’s rating, which has junk status. Better ratings would bring lower financing costs and greater earnings in the long term at GMAC.

Yesterday’s announcement follows several high-impact moves by Wagoner aimed at making GM a leaner organization, reducing staggering costs and putting a focus on building vehicles consumers want.

On Tuesday, GM announced a sweeping buyout plan, offering packages of $35,000 to $140,000 per person to clear its employment ranks of thousands of high-wage union positions.

The agreement could reduce GM’s smothering labor costs and averts, at least for now, a costly labor fight with the United Auto Workers. Dealers are also reporting early success at selling GM’s large sport-utility vehicles, whose redesign was accelerated last year in a risky move by GM executives. GM said yesterday that it is boosting production of the line, which includes the Chevrolet Tahoe, GMC Yukon and Cadillac Escalade.

John Fitzgerald, general manager of Fitzgerald Chevrolet in Frederick, said the Tahoe is doing well on his lot, especially the priciest models loaded with special equipment, such as rear-view cameras, navigation systems, and big rims and wheels. Customers are paying about $48,000, without GM piling on rebates.

“People are actually willing to buy this one without GM having to pay them to do it,” Fitzgerald said.

Wall Street analysts still are cautious about elements of Wagoner’s turnaround efforts. In a research note yesterday, auto analyst John Murphy of Merrill Lynch & Co. said the buyout package looks good, but the number of workers who will take it remains in question. He said the value to workers does not offset the lifetime health-care benefit that many will lose, which might cause many workers to decide against taking the buyout.

“What’s obvious is that there is far more sense of urgency evident in the actions of the major auto companies here that they really are trying to make rapid and obvious progress in sorting out their various problems,” said Dana Johnson, chief economist at Detroit-based bank Comerica Inc. “The financial markets are holding their feet to the fire.”

Shares of GM closed down 1 cent at $22 per share yesterday.

Wagoner took over as GM’s chief executive in 2000, one year after the company turned a profit. He added the role of chairman in 2003. Much like the workers GM is targeting in its buyout offer, Wagoner is 53 years old and has worked for GM for 29 years. As GM’s troubles began to build, Wagoner last spring took direct control of the troubled North American division, pushing aside other executives.

Wagoner began laying out his restructuring plans for the automaker at GM’s annual shareholders meeting in June. He said the keys to GM’s turnaround were focusing on building better cars and trucks, reducing the company’s costs, sharpening GM’s marketing focus, and finding ways to curb crushing health-care costs.

GM’s chief got to work in October, when the company and the UAW reached a deal to pare health-care benefits for 105,000 autoworkers, saving the automaker $3 billion per year. A month later, Wagoner outlined a plan to scale back its manufacturing operations, cutting 30,000 factory jobs and closing five assembly plants and other facilities.


Wagoner has received a lot of prompting from Jerome B. York, the top lieutenant of billionaire GM investor Kirk Kerkorian. In January, York assailed the automaker in a blistering two-hour speech, urging it to do more to repair the company and do it faster. York now sits on the GM board. Through his Tracinda Corp. investment firm, Kerkorian owns 9.9 percent of the company.

“There’s a strong feeling that the best thing that happened to them is Jerry York and the involvement of Kerkorian’s group,” said Mark Rikess, chief executive of the Rikess Group, an automotive consulting firm in Burbank, Calif. He said it appeared Wagoner has a “good cop, bad cop” opportunity with Kerkorian’s representative on board. “Everyone knows that GM has got financial problems. They also know there is a new cast of characters that’s not afraid to bring additional pressures to bear.

In Wisconsin, mega-dealer John Bergstrom said the new SUVs, particularly the Chevrolet Tahoe, are selling well. The vehicles stumbled in the second half of last year after oil spikes sent gas prices shooting up. Fuel prices have stayed higher than they were before, but Bergstrom said the SUV business—the heart of GM’s global profitability—is in “boom time” at his dealerships. “It’s starting to get a lot hotter than we thought it was going to be. The truck business hasn’t been real good. To have a product that is literally sold out is very refreshing.”

Bergstrom said full-size SUVs are the “last bastion” of GM leadership in the market. He said customers are responding to the new feature of cylinder-on-demand technology, which shuts down four of the vehicle’s eight cylinders during highway driving conditions, saving gas.

GM said it is boosting production at the three assembly plants where the SUVs are built. Altogether, GM will build about 11,000 to 12,000 more trucks this year than originally planned.

“When is the last time you heard GM adding production—to anything?” said Jim Sanfilippo, senior industry analyst at AMCI, a consulting firm in Bloomfield Hills, Mich. He called the Tahoe the Toyota Camry of the full-size SUV market.

Sanfilippo said the large SUV platform is particularly promising because it will share vehicle architecture with forthcoming GM truck models, including the Suburban, Avalanche and—most significantly—the high-profit Chevrolet Silverado and GMC Sierra, GM’s full-size pickup trucks.