GM lacc project on transmission parts? Cant quite recall..
ANy thoughts on this: Good or bad? if even relates, Private equity equals less old school auto bureaucracy?
GM to Sell Allison Unit
In $5.6 Billion Deal
By JOHN D. STOLL
June 28, 2007 2:37 p.m.
DETROIT -- General Motors Corp. on Thursday said it has agreed to sell its Allison Transmission unit for $5.6 billion to a pair of private-equity firms, extending the auto maker's fund-raising drive and its push to focus on improving core automotive operations.
The Detroit auto maker said in a news release it has struck a preliminary agreement with Carlyle Group LP of New York and Canadian investment firm Onex Corp., marking the latest in a string of large private-equity deals in the beleaguered U.S. auto industry. Carlyle and Onex beat out Centerbridge Capital Partners among other bidders for Allison, a highly profitable unit that specializes in building transmissions for GM's heavier trucks but also sells products to other customers.
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1/25/07The Allison divestiture is the latest in a long line of liquidity-boosting moves the auto maker has executed over the past two years. GM, which had announced in January that it was considering a sale of Allison, is in the midst of a wide-ranging restructuring of its North American operations, as it aims to stem large cash outflows and restore profitability in the region.
"This is another important step to strengthen our liquidity and provide resources to support our heavy investments in new products and technology," GM Chief Executive Rick Wagoner said in a news release.
GM shares, which have been gaining ground recently amid optimism about the prospects for upcoming talks with the United Auto Workers union, hit their highest level since January 2005 Thursday. The stock was up 2.1% at $38.18 recently on the New York Stock Exchange.
"This was a well-performing, high return-on-investment business that was sold at a reasonably high valuation," Morgan Stanley auto analyst Jonathan Steinmetz said in a note to investors. "The key will now be for GM to employ the liquidity toward improving a challenging business with low return on investment."
Giving Up Profitable Business
GM for the first time in May broke out information on Allison's performance, giving analysts insight into the financial picture of the unit. Given the valuation of other competitors, including Cummins Inc. and ArvinMeritor Inc., some analysts were expecting a deal to be in the $5.5 billion range.
Allison's transmissions have a dominant share of some of the major sectors of the heavier-duty truck markets. Allison, which was founded in 1915 and purchased by GM in 1929, raked in $2.3 billion in revenue last year and posted an operating profit of nearly $350 million, making it one of GM's highest-margin divisions.
Carlyle Managing Director Greg Ledford said in an emailed statement that "Allison should enjoy continued growth as the adoption rate of automatic transmissions in commercial vehicles continues to grow."
The Allison sale, expected to close as early as the third quarter pending union and regulatory approval, will include the transfer of seven manufacturing sites in the Indianapolis area and the world-wide distribution network. The company's production facility in Baltimore will remain with GM. The Baltimore operation is a critical cog in GM's attempt to gain traction in the hybrid-electric vehicle race.
Boosting Liquidity
Despite the market's optimism about the sale, Fitch Ratings auto analyst Mark Oline cautioned that the deal will take a bite out of operating cash flow at GM, which he feels is still in the early stages of its restructuring process. "The North American operations are not really making money and significant progress still needs to be made to reverse negative cash outflows," Mr. Oline said.
Morgan Stanley estimates that the Allison divestiture will negatively impact annual earnings by between five cents and 10 cents per share.
GM has boosted liquidity by selling operations -- including a controlling stake in its GMAC lending arm for $14 billion and interest in Japanese automotive alliances -- and by lining up billions of dollars worth of credit lines. The auto maker has pledged several assets, including its remaining 49% stake in GMAC, to obtain the lines of credit. In May, GM said it gained commitments for a $4.1 billion credit revolver, which adds to a $4.6 billion revolver that was extended in November.
As of March 31, GM had $24.7 billion in cash and available assets on hand, down from $26.4 billion at the end of 2006. Investors have expressed alarm over the rate that the company is burning cash, and executives have said the company plans to slow the rate of burn in 2007. But GM nevertheless will post outflows once again this year.
The auto maker is said to be close to selling its medium-duty truck unit, based in Flint, Mich. Navistar International Corp., based in Warrenville, Ill., is believed to be the main bidder for that business.
The additional liquidity that divestitures and financing provides could be used to pay down GM's enormous obligation to retiree benefits, notably health care. One of the scenarios GM is currently considering would have the company funding a new health-care trust that could me managed by the UAW. GM's long-term health-care obligations were estimated to be $68 billion as of Dec. 31.
The labor negotiations that are set to get under way next month are critical for GM's turnaround efforts.
Last week, GM's top supplier and former subsidiary Delphi Corp. inked an agreement with the UAW related to labor costs and other matters. The deal, which GM was influential in forging, clears GM's plate for its own labor negotiations. GM has said its exposure to Delphi includes assuming about $7 billion in largely noncash benefit obligations, and an agreement to supplement hourly paychecks for Delphi workers |
