Financial impact of General Motors Corp's sale of GMAC.

Today, General Motors Corps (GM) $14 Billion over 3 year deal to sell 51% of GMAC to Cerebus Capital Management finally closed. I've been wondering, what is the potential financial impact of this decision?

I found the 2005 General Motors Acceptance Corporation 10-K on the SEC's Edgar online. If you go to page 70 and look at the Consolidated Statement of Income, you see a net income of the following: (in Millions)

2005: $2,394
2004: $2,913
2003: $2,793

For comparison, General Motor's net income (which includes these amounts) for the same three year period:

2005: (10,567)
2004: 2,804
2003: 3,859

If you subtract 51% of the income provided from GMAC from these results, you get:

2005: (11,788)
2004: 1,318
2003: 2,434

In 2003, GMAC provided 72% of the net income to GM as a whole. In 2004, it provided more than 100%. In 2005, it reduced already HUGE losses by $2.4 Billion.

Value of GMAC

I'm going to try doing a quick valuation of GMAC. My apologies for using net income instead of cash flows. GMAC's operations are quite complex, so I'm going to stick with that for now.

- GMAC currently produces $2,500 in net income
- Net income growth will be 5%
- Beta is 0.8 (GM's is 1.88, but obviously this will change)
- Risk free is 4.88%
- Risk premium is 7.39% (VTI 3 year return = 12.27%)
- Required return = 10.78%

If this modest growth continues for 15 years, the Present Value would be $25,647.82.

Price paid by Cerberus

"GM will get the $14 billion over the next three years, including the purchase price of $7.4 billion, a GMAC distribution of $2.7 billion and loan repayments worth about $4 billion."

If I understand it right, Cerberus Capital is paying $7,400MM for an asset worth 51% of $25,647MM ($13,080MM) - with the rest coming out of GMAC.


Obviously this is a much more complex transaction than my simple analysis would imply, and my assumptions are not up to par. I can see why GMAC would want to be seperate from GM's terrible credit rating, and I can see that GM is absolutely desperate for the cash the sale will bring in. But it sure seems like a STUPID move to me. When you have an business with a profitable section and an unprofitable section, you sell off the part that is unprofitable. It's common sense. GM is giving up control of a part of it's business that actually makes money. Sure, they'll still own 49%, but now they won't have the "synergy" of controlling their own finance company. Ford's approach of mortgaging out the factories and retaining Ford Motor Credit makes an awful lot more sense to me - you don't slaughter the goose that lays golden eggs.