Deals that changed the market in 2006: Cerberus FIM Investors’ acquisition of GMAC

Six deals that changed the market in 2006

When GM made the decision to sell a majority stake in its General Motors Acceptance Corp (GMAC) unit in early 2003 it had one clear objective: it wanted to sell the subsidiary to a highly rated (by which it was assumed financial) institution in order to preserve its investment-grade rating. The deal that was eventually struck between GM and a consortium headed by Cerberus Capital Management achieved neither of those things: GMAC was sold to a private equity buyer in a deal that left the company with a double-B rating. But this deal was a stark illustration of the flexibility and buying power that private equity players have been afforded through their access to cheaper funding and greater leverage.

The successful sale of GMAC was never going to be easy. As rating agency Moody’s pointed out at the beginning of 2006: “We believe that there are very few enterprises worldwide that have the strategic interest, credit profile and financial wherewithal to purchase a controlling stake in GMAC.”

So it proved, and the investment-grade strategic investor that GM was hoping for did not materialise. But what did materialize were two private equity bidders (KKR and Cerberus) that could see past the obvious hurdles such a deal represented. This was a case that very clearly lent itself to private equity because of the headline risk associated with the seller. “GM was too much in the news,” says David Head, co-head global FIG M&A at Citigroup in New York, which advised the Cerberus consortium. “It would have been very difficult for a bank to take on that kind of exposure. GMAC was a high-quality company attached to a distressed company and was therefore perceived as being distressed too.”

Having been part of the consortium that acquired GMAC’s commercial mortgage arm for nearly $9 billion in March, KKR was assumed to be in the stronger position. But Cerberus, together with Citigroup, Aozora Bank and a subsidiary of PNC, emerged triumphant in April with a deal to purchase 51% of GMAC for $7.4 billion.

Cerberus itself has extensive roots and experience in dealing with distressed companies, which is probably why the association with GM was not a deterrent. But the whole driver behind the deal was to delink GMAC from GM as much as possible – although GM retains a strong minority interest and a strategic business relationship. The rating agencies themselves had substantial concerns about the risks for a company such as GMAC of private equity rather than strategic ownership, and were vocal about the criteria that they needed. It is testament to the growing influence of the private equity industry, together with the financing power on which such companies can now draw, that this deal was possible at all. GMAC’s $300 billion balance sheet was the largest ever acquired by a private equity firm, and the deal will act as a catalyst for further, larger deals to be attempted.

As with so many debt-financed takeovers last year, securitization played a key role in getting the acquisition done. Citigroup arranged a total $25 billion funding to back the acquisition, which involved a $10 billion securitization. The facility included a commitment to purchase up to $4 billion of unrated notes backed by US collateral – allowing previously unsecuritizable assets to be funded in this way. Citigroup committed the entire amount of the $10 billion securitization and was also a co-investor in the private equity. The consortium did not assume $14 billion of (presumably the most challenging) GMAC assets.

What was clear right from the outset was that Cerberus was prepared to go the extra mile to get GMAC. Boss Stephen Feinberg saw the acquisition as crucial to the development of the firm and devoted an 85-strong exclusive operations team to the pursuit of the company. “Cerberus had made an investment in its operations team years ago which meant that we could immediately deploy people who have run auto businesses and who have run consumer and commercial credit organizations. That way we could undertake the due diligence quickly and accurately,” says Lenard Tessler, senior managing director at Cerberus. “This meant that we did not have to change our offer one penny during negotiations.” Tessler describes Cerberus as a synthetic strategic investor in GMAC. “We have a long-term investment horizon so we can work with management to achieve their goals. We do not have to go in there and gut the place to build the business. Instead we invest for growth.”

Cerberus was established in 1992 and prior to the GMAC deal had $18 billion in assets under management. What its acquisition of GMAC illustrates is the difference in approach between the private equity market and the public bank market. Although the rating agencies did not give the deal an investment-grade rating, the consortium is committed to getting the company to a double-A rating – something that will likely take a few years.

But for any institution – particularly one of Cerberus’s size – a $7.4 billion acquisition is a substantial commitment. “We are not a sector-specific firm but financial services is very important for us,” says Tessler. “GMAC is an American icon with a tremendous platform.”