By Chris Haak

06.29.2007

Yesterday, GM announced that it had agreed to sell its Allison Transmission unit to private equity firms Carlyle Group and Onex Corp. for about $5.6 billion. Wall Street cheered the announcement, sending GM shares up to $38.19, nearly $20 per share higher than the shares were at their low point in 2005 during the worst of GM’s bankruptcy fears. It seems that GM has managed to get a better price for Allison than Wall Street was expecting.

Allison Transmission, which makes transmissions for commercial trucks, buses, and military vehicles, as well as dual-mode hybrid transmissions for the upcoming light duty hybrid pickups and SUVs and for the popular Duramax/Allison combination in 2500 and 3500-series trucks, is headquartered in Indianapolis, Indiana. The sale announced yesterday excludes a plant in Baltimore that makes conventional and dual-mode hybrid transmissions used in GM’s light duty trucks.

The Allison money will help offset the expected $7 billion cost that GM will incur to fund the UAW-Delphi bankruptcy settlement, which (if approved by union membership) will pay union workers upfront payments as well as ongoing supplemental wages for a period of time, in return for a reduced hourly rate in the future. There is also speculation that GM might use the Allison money to help fund a potential union-managed trust fund to pay for workers’ health care coverage, similar to the agreement that Goodyear came to with its union membership last year.

Unfortunately for GM, the Allison unit was “highly profitable,” and now it has killed another cash cow. The sale of 51% of its GMAC financing arm to Cerberus (the same company that bought Chrysler) marked the sale of another major contributor to GM’s black ink in North America.

Other than these two, more “non-core” assets that GM has sold off in the past two years include stakes in Fuji Heavy Industries Ltd. (Subaru), Isuzu Motors Ltd. and Suzuki Motor Corp.

It’s a shame that GM has to continue selling assets, but this is a necessary move for them to add to their cash balance and ensure that they can still meet their operating cash needs and keep the company running. But this is not the end of GM selling everything but the proverbial kitchen sink. They’re also in talks to sell the (also profitable) medium-duty truck business. No announcement has been made, but the word is that Navistar is the front runner to acquire that business. Medium duty trucks are sold as the Chevrolet Kodiak/GMC Top Kick conventional cab trucks, and the T- and W-series cab over engine trucks, which are rebadged Isuzus, and are generally labeled as 4500-8500 series trucks (versus 1500-3500 series for the light duty ones).

Shedding assets of non-core businesses as GM and Ford have been doing is OK from the standpoint of allowing management to concentrate on core operations, and monetizing an asset, but it also eliminates a layer of safety net should core operations falter. There have been several quarters over the past few years that GMAC results helped to prop up GM’s regular results. Now, they’ll only be able to help 49% as much as they had before. After this year, there will be no return from Allison, and likely no return from the medium duty unit if it’s sold off.

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