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By Jui Chakravorty Das
NEW YORK Dec 30 The federal bailout of auto
lender GMAC LLC puts a floor under the potential losses for its
owner Cerberus Capital Management and could provide a roadmap
for the private equity firm and its investors to cash out with
their remaining capital.
The development underscores how the deepening government
support for the U.S. auto industry has spread to include help
for the battered sector's most controversial participant,
Cerberus, a private Wall Street firm with deep connections to
the Republican Party.
Not that Cerberus, which bought a 51-percent stake in GMAC
from General Motors Corp (GM.N) two years ago, won't take its
licks as well. It will become a much smaller shareholder in the
finance firm under a government-brokered restructuring.
GMAC won approval from the Federal Reserve to become a bank
holding company last week, giving the auto finance company
access to government lending programs.
Late on Monday, the U.S. Treasury also announced it would
provide a cash infusion of $6 billion into GMAC under the $700
billion Troubled Asset Relief Program.
"It's a good thing for GMAC -- it literally throws GMAC a
lifeline," said David Kudla, chief investment strategist of
Mainstay Capital Management LLC. "So in that regard it's good
for Cerberus and good for GM. They are stakeholders. GMAC
desperately needed capital."
As a condition for winning bank status and access to
low-cost funding from the Fed, Cerberus will have to reduce its
51 percent stake in GMAC to 33 percent of total equity and 14.9
percent of the voting shares.
Under the Fed's plan, Cerberus' co-investors will take
control of their own holdings in GMAC rather than through
Cerberus' fund. Cerberus has not detailed its co-investors in
GMAC, but they include Japan's Aozara Bank Ltd. (8304.T)
General Motors Corp (GM.N), which owns the rest of GMAC,
will have to shrink its stake to 10 percent by transferring the
rest of it to a trust. The trust will have to dispose of that
stake within three years, prompting several investment bankers
to expect an offering of GMAC stock.
Such an initial public offering could also allow Cerberus
and its co-investors to cash out their 2006 investment in GMAC,
a goal that had been thrown into uncertainty by the deepening
crisis at the firm.
JP Morgan analyst Himanshu Patel said in a research note on
Tuesday that GMAC could eventually go public, helping the
Treasury and the firms' existing investors sell their stakes.
'A SMALLER STAKE IN A VIABLE COMPANY'
GMAC had been pushed to the brink of bankruptcy as it
struggled amid a deepening credit crunch that raised its
borrowing costs sharply and a housing crisis that hammered its
residential mortgage lending unit, ResCap.
But GMAC has now avoided that hard landing with government
assistance, a positive for Cerberus, analysts said.
"It's a smaller stake in a viable company as opposed to a
larger stake in a bankrupt company," said Mirko Mikelic, a
portfolio manager at Fifth Third Asset Management in Grand
GM also stands to benefit from a better-capitalized GMAC
that can get back to its core business of providing loans for
car shoppers in GM showrooms.
GMAC said it would provide loans to a wider range of
borrowers as its own access to credit eases, and GM's North
American sales chief Mark LaNeve said he expected that would
spur sales and dealer orders.
A Cerberus spokesman declined comment on the government
The restructuring of GMAC will take the firm in a different
direction than the private equity firm had envisioned.
Cerberus, which also owns a majority stake in Chrysler LLC,
had been in talks with GM about a potential merger with
Chrysler and was clearly eager to hold on to GMAC.
Early on in talks with Chrysler, Cerberus had floated the
possibility of swapping Chrysler's auto company for the
remaining 49 percent stake in GMAC, sources familiar with the
talks had told Reuters.
That option would appear to be off the table now as
Cerberus' total stake in GMAC is reduced and its co-investors
control their own holdings.
The timetable and more details on the transfer will be
provided by GMAC early next year, according to a person with
direct knowledge of the transaction, who was not authorized to
discuss it publicly.
Cerberus is not obligated to disclose its losses because it
is a private company.
Cerberus paid a net $6.4 billion for its share of GMAC
including a later, offsetting payment from GM.
One investment banker, who asked not to be named, estimated
that the current value for GMAC would be near $9.25 billion, or
roughly the book value of the firm.
That would imply that Cerberus had lost about 26 percent of
its investment in GMAC before Monday's bailout was announced
and would exclude the unspecified additional capital that
Cerberus had invested.
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(Additional reporting by Kevin Krolicki in Detroit)