For Sale by Owner: GM Raising Cash

To strengthen its balance sheet, GM is likely to sell off interests in truckmaker Isuzu, making it the third Japanese alliance it has severed

Cash-strapped General Motors (GM) is dumping yet another Japanese alliance. Having hived off its stake in Fuji Heavy Industries last October and most of its holding in Suzuki Motor earlier this month, GM has embarked on what looks like yet another cash-raising exercise that could see it selling off its stake in Isuzu Motors, a Tokyo-based truckmaker.

Late on Mar. 29, GM issued a short statement saying it's looking for a private buyer for its 7.9% stake. If the deal goes through it will end -- or at least vastly reduce -- a 35-year equity relationship between GM and the Japanese company.

The Nikkei Keizai Shimbun newspaper reported that the buyers are likely to be Japanese trading houses Mitsubishi (MSBHY) and Itochu (ITOCY), both of which are already shareholders in the truckmaker. Mizuho Financial, a bank, may also take a small stake. Isuzu confirmed it was aware of GM's decision.


  "Isuzu understands that GM is taking steps to strengthen its balance sheet and liquidity position during this critical phase of its North American turnaround," Isuzu noted in a statement. "Based on this understanding, Isuzu agreed to study the proposed possibility." Both Itochu and Mitsubishi confirm they'd been approached by GM about the Isuzu stake, which is valued at about $340 million.

While that's far less than GM raised through its previous sales -- the Suzuki and Fuji Heavy deals netted GM about $2.7 billion -- analysts say the move is a smart one. For sure, GM badly needs cash. On Mar. 29, Moody's Investors Service downgraded its debt once again on concerns that GM would have to pay back $3 billion of debt more quickly than previously thought.

Moody's now rates GM at a credit rating of B3 -- six notches below investment grade. Meanwhile, the United Auto Workers union said Wednesday that union leaders had rejected a contract offer that GM's biggest supplier, Delphi, made last week. A strike would be catastrophic for GM, which wants to shed 30,000 workers and close 12 facilities in the U.S. by 2008, and would push the world's No. 1 carmaker closer to bankruptcy.


  The announcement to sell Isuzu, while not a shock, highlights just how badly GM needs cash. The alliance between Isuzu and GM has arguably been more fruitful than those with Suzuki and Fuji Heavy, which controls Subaru. GM and Isuzu jointly produce diesel engines in the U.S. and Poland, and supply each other with trucks.

Some onlookers thought GM might hold on a little longer. "Out of the three [alliances] the collaboration with Isuzu is the strongest," says Shinya Naruse, an analyst at Nomura Securities in Tokyo. "It's not a surprise [that they're selling] but it is earlier than expected."

Still, even without an equity relationship there's no reason the two firms can not continue to work closely together, says Noriyuki Matsushima, an analyst at Nikko Citigroup in Tokyo. "Assuming that GM and Isuzu continue their alliance in diesel engines and other areas as if nothing has changed, then we would not expect any impact," Matsushima said in a research note. Suzuki provides a model. Since the mini-carmaker bought back GM's stake earlier this month, the operational terms of their alliance are unchanged.


  With Isuzu expected to record operating profits for the year ending March on the back of strong sales, it is as good a time to sell as any. Isuzu's stock price, which bottomed out at 25 cents in 2002, now trades at $3.60. (Following the announcement of a possible sale, Isuzu shares closed in Tokyo up 2.5%.)

Analysts also welcome Itochu and Mitsubishi as the prospective buyers. Both trading houses are stockholders in Isuzu and have interests in the truck business. By buying out GM, they could work more closely with Isuzu in distribution and marketing, says Nomura's Naruse. That should benefit Isuzu, which is experiencing growing demand in Asia but doesn't have the size to invest heavily in distribution channels.

Ultimately, though, the transaction highlights GM's woes rather than its ability to cut a deal. For sure, ditching the three alliances in Japan within six months repudiates a global strategy that GM Chairman G. Richard Wagoner Jr. inherited when he took over in 2000.


  And while some of the alliances provided GM with access to badly needed technology, in many cases GM paid a lot of money and didn't get much of a return on its investment (see BW Online, 3/7/06, "GM: Cashing in on Suzuki").

In time, the deal could also cause uncertainty for Isuzu. GM exits with the Japanese truckmaker on a high, but whether it's big enough to remain independent -- Isuzu's annual sales are just $12.7 billion -- is a moot point. Just as Toyota (TM) stepped in at Fuji Heavy when GM sold its stake, rival auto makers may now be weighing an investment in the truckmaker. One thing is clear: GM won't be forming new alliances in Japan any time soon (see BW Online, 10/5/05, "Fuji Heavy Trades GM for Toyota").

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