GM in Talks to Sell Mortgage Unit Stake

March 29, 2005 12:47:00 PM ET

DETROIT (Reuters) - General Motors Corp. (GM) said on Tuesday it is in advanced talks to sell off a majority stake in its GMAC Commercial Mortgage unit, driven by funding constraints and its own poor credit rating.

A 50 percent stake in the unit is worth about $1 billion, JP Morgan analyst Himanshu Patel estimated.

No definitive agreement has been made, and GM's finance unit GMAC intends "to retain a significant equity interest in the business," GM spokesman Jerry Dubrowski said.

"We're now engaged in advanced discussions with a consortium of investors regarding the sale of a majority stake in Commercial Mortgage."

The commercial mortgage unit originates and services mortgages in a variety of business sectors and generated profits of $204 million last year.

Dubrowski declined to comment on one media report identifying buyout firm Kohlberg, Kravis Roberts & Co. as a top contender for the more than 50 percent equity stake in GMAC Commercial Mortgage that it is up for grabs.

But he took issue with recent reports saying that GM, which has about $23 billion in cash, was orchestrating the sale to add to its cash horde.

"That's really not the case," Dubrowski said. "If there were cash that would come from such a transaction, it would not flow back to General Motors. It would stay within this business. That's the whole point of it, to be able to have funding," he said.

"The capital markets are constrained right now, and as a result of that you know introducing the new investor into the business would help expand its growth more rapidly and more profitably."

Dubrowski was referring to the fact that GM is facing a possible credit downgrade to "junk" status by at least two leading rating agencies. And the embattled auto giant, which had more than $300 billion in debt outstanding at the end of 2004, is increasingly in need for alternative funding sources for some of its businesses.

GM, which has been losing market share and is struggling to revive profits at its core automotive business, warned earlier this month that it expects 2005 overall profit to be as much as 80 percent below its prior forecast.

Despite what some might call negative factors behind the planned sale of GMAC Commercial Mortgage, Patel in a note to clients on Tuesday billed it as a "positive" development that could help improve both GM and GMAC's liquidity.

"Broadly speaking we think the market would be pleased with any such transaction," he said.