GM and the GMAC Sale: Devil's In the Details (GM)

This morning's Wall Street Journal has a piece by Ian McDonald and Serena Ng (sub. req.) picking apart General Motors Corp's (GM) sale of GMAC:

The buyers of the 51% chunk of General Motors Acceptance Corp., a group of investors led by investment fund Cerberus Capital Management LP, can walk away from the complex transaction without paying a cent if GM's credit rating deteriorates in the coming months, for example. And even if this cash infusion does recharge GM's business, and the car maker can buy back GMAC's lucrative automotive-finance business in the future, analysts say GM will face the same bind as pawn-shop customers: paying through the nose for something sold for peanuts.

Shares of GM have fallen 6.4% to $19.91 on the New York Stock Exchange since the start of the week. Over the same stretch, its benchmark 8.375% bonds due in 2033 have lost 3.1 cents to trade at 71.75 cents to the dollar, yielding nearly 12%, according to data from MarketAxess.

"The deal doesn't do anything to fix their auto operations," says John Novak, a stock analyst at Morningstar Inc., Chicago, who advises investors to acquire shares only if they fall below $9 apiece. "It's also pretty easy for Cerberus and the others to walk away."

Nine bucks a share? Look, I'm underwater on my GM holding. And it's a big position for me. Yet I'd be tempted to buy more stock if it got that low and nothing had changed my current view. But I hope it never sinks that far down.

Anyway, the article goes on to state that if GM's unsecured long-term debt sinks four notches deeper into below-investment-grade ranks to a triple C rating, Cerberus can back out of the deal before it closes. Cerbus can also bolt if GMAC's credit rating slips below its current level of double-B or if the company's residential-mortgage or insurance units see a credit tumble.

Such "escape clauses" aren't unusual in big acquisitions such as this one. But in GM's case, there is a real chance the deal might be derailed by factors somewhat out of the auto giant's control -- chiefly, a strike by workers at its biggest supplier Delphi Corp., which could cripple GM's manufacturing and cause it to bleed cash fast. If a walkout happens, GM's credit rating almost certainly will be downgraded. GM's auto sales also have slumped and are another factor that could cause its ratings to deteriorate.

The piece continues and touches on the Pension Benefit Guaranty Corporation:

Few analysts expect the PBGC to veto the GMAC stake sale. Instead, they expect the agency to require GM to commit a portion of the $14 billion proceeds from the sale toward the auto maker's pension fund, which the PBGC says is underfunded, a characterization that GM disputes.

As usual with these feature pieces from the Journal, there's more than just what I've highlighted. So be sure to read the whole thing.