KKR’s $13B bid for GMAC emerges, vying with Cerberus

The non-binding offer was first reported in The Wall Street Journal. KKR’s partners on the bid are reportedly Wachovia, Merrill Lynch, Bank of Nova Scotia and General Electric. Wachovia had earlier been reported to have dropped out of the KKR group. A spokesman for KKR declined comment.

Cerberus Capital Management has its own bid and until the KKR news had been the leading contender. According to the Journal report, GM still is likely favoring the Cerberus bid, since KKR is trying to avoid “lease residuals,” which are the cars that come back on to GM’s books once leases run out, and which could depreciate in value and translate to losses if GM goes bankrupt.

GM wants to sell the unit so it can improve GMAC’s credit rating by separating it from the parent’s junk debt. That would help GM, which has been losing money, offer cheaper financing on the sales of its cars. Cerberus has reportedly argued that it could obtain an investment-grade rating for GMAC after six months of ownership.

There are three main obstacles for potential buyers, said John Murphy, an analyst with Merrill Lynch, in a report last week. First, any buyer will want to avoid responsibilities for GM’s pension liabilities should the parent go bankrupt, which the Pension Benefit Guarantee Corp. has estimated is around $25 billion underfunded, though GM says it is overfunded.

Second, GM is piling on new incentives, which lowers the residual value of its vehicles. Lastly, an investment by a private equity firm is likely to hinder the possibility of getting the much desired investment grade rating for GMAC.

“Prospects for achieving a credit rating that supports meaningful levels of unsecured financing post the speculated sale also remain murky, though [that] may be a secondary concern given the abundant secured finding channels,” wrote Goldman Sachs analyst Robert Barry in a report last week.

He added that the strong ties between GMAC and GM could prove “an insurmountable obstacle” for a buyer with the stresses from GM’s North American operations continuing to build.

GM’s board is expected to meet, as it normally does, on the first Tuesday of every month, to discuss the future of the division. GMAC posted revenue of $15.8 billion for the first nine months of the year and net income of $2.2 billion, compared with revenue of $15 billion and identical net income in the year prior period.

Because GMAC has so many strings attaching it to its parent, several observers anticipated that a more likely outcome would be the sale of ResCap, GM’s mortgage business.