GM buys time with $14bn finance sale

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The Independent Online

The board of General Motors moved to shore up confidence in its chief executive, Rick Wagoner, yesterday after the troubled car maker sold a controlling stake in its finance arm in a desperate gamble to avoid sliding into bankruptcy.

GM raised $14bn (£8bn) through selling a 51 per cent stake in General Motors Acceptance (GMAC) to a private-equity consortium, but some analysts warned the company was making a strategic mistake by ceding control of its most profitable business.

Mr Wagoner is battling to turn around the world's largest car maker after years of waning market share and rising labour costs. The company's losses last year were recently revised up by $2bn to $10.6bn.

Illustrating the problem, GM also released new vehicle sales figures yesterday which showed a 14 per cent fall in March against the same month in 2005. The company said it was cutting back on less profitable sales, but its decline was in stark contrast to vibrant rival Toyota, which recorded a 7 per cnet sales gain.

Although the long-awaited sale raises a significant sum of cash for GM - $10bn to be received by the end of 2006, with the remainder to come over the next three years - most of that will be needed to fund restructuring plans that already include 30,000 redundancies.

The company also needs money to bail out its bankrupt supplier, Delphi. GM will part-fund a new wage deal at the components manufacturer, where unions are threatening a strike that could halt production at GM and tip the car maker into bankruptcy.

A statement on behalf of the board praised the GMAC deal as "an important milestone" in GM's turnaround plan. But the lukewarm response to the deal on Wall Street increases the pressure on Mr Wagoner, who has been criticised by investors for a slow response to the company's financial crisis.

In an unprecedented public display of support, the board statement yesterday recognised and attempted to quell the discontent.

"While there is still much work to be done, the GM board has great confidence in Rick Wagoner, his management team and the plan they are implementing to restore the company to profitability," it said.

The consortium taking control of GMAC is led by Cerberus Capital Management, a New York-based private-equity group, with backing from Citigroup and Aozora bank.

Cerberus promised that GMAC would continue to offer cheap financing deals on GM vehicles.

Deutsche Bank's Rod Lache was among the analysts expressing scepticism at the deal.

He said it could "wind up being another strategic error", since it cuts in half the cash coming in from GM's most profitable business. Mr Lache said: "A sale could also ultimately turn into another large-scale value transfer to the United Auto Workers union, since a larger cash position reduces the UAW's need to make additional concessions."

He added: "The bottom line is that we believe GM deciding to cede control of this strategic business reveals how perilous GM's situation has become."

GM's own bonds - among the most widely held corporate debt in the world - was downgraded to junk status last year, sparking a panic in financial markets.

The credit rating agencies said yesterday significant risks remain and they are not likely to consider turning more positive until the end of talks between GM, Delphi and the UAW.

Last week, Delphi said it had missed a deadline for a deal, and would ask a bankruptcy court to allow it to impose pay cuts of up to 40 per cent, in defiance of union protests.

GM is seen as having most to lose from a strike at Delphi, and is likely to have to increase the portion of Delphi wages that it funds directly.

Mr Wagoner said yesterday: "We have to come up with something that works for everyone. We've found that if you work with the union rather than fight the union, that works better."

Yesterday's deal appeared to have failed in its aim of improving GMAC's crucial credit rating to a level above junk status, according to rating agencies' initial responses. That means there will be no immediate respite from the crippling costs of servicing junk-status debt at GMAC.