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GM Selling Off Delphi Stake

Federal pension fund also selling off stake, leaving hedge funds in control.

by on Mar.31, 2011

Delphi CEO Rodney O'Neal.

Putting further distance between it and its one-time parts subsidiary, General Motors will sell off its stake in the massive automotive supplier Delphi.

The $3.8 billion deal will be paired with the sell-off of the stake in Delphi held by the federal Pension Benefit Guarantee Corp.  Both GM and the PBGC received their shares in the supplier following its emergence from bankruptcy protection in mid-2009.

Those moves will leave control of Delphi Automotive in the hands of the hedge funds that also took a stake in the supplier as it wrapped up what was the longest run through Chapter 11 in U.S. industrial history.

The decision to sell off its Delphi holdings comes just weeks after GM also generated $1.0 billion through the sale of its preferred holdings in Ally Financial, the lender once known as GMAC.  The Ally transaction will generate a one-time gain of $300 million, while GM will book a $1.6 billion profit from the sale of its Delphi shares.

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“We are systematically delivering on our commitment to strengthen and simplify our balance sheet,” said Dan Ammann, GM senior vice president and chief financial officer as of April 1.

Officially known as Class A Membership, GM took its stake in the supplier as part of the complex financial package that helped Delphi finally get back to business after it voluntarily plunged itself into bankruptcy in 2005.

The huge parts company was originally a collection of GM parts operations, many of which were struggling to survive because they were stuck with labor costs far above those of Delphi’s competitors.  The company was officially spun off in 1999 and Delphi set out to bring down those costs, while selling off its least competitive units.  Still, it couldn’t maintain a profit and saw bankruptcy as a way to deal with many of its remaining obstacles.

But the Chapter 11 filing proved to be more challenging than expected, especially as the economy started to turn south.  The planned exit from bankruptcy was delayed when a proposed deal fell through at the 11th hour, and eventually required the help of former parent GM to pull through.

As part of that deal, GM was required to take back some Delphi operations – and employees.

But longer-term, “The goal is to have a traditional (automaker)-supplier relationship,” said General Motors spokesman Jim Cain.

Notably, Delphi has been able to curb its dependence on the U.S. giant, which once accounted for nearly 90% of its business – but now generates less than half of Delphi revenues.

The partsmaker reported $13.8 billion in revenues for 2010.

“These transactions represent an important step in positioning Delphi to continue to increase shareholder value,” Rodney O’Neal, Delphi president and chief executive officer, said in a prepared release. “We continue to have significant financial flexibility and remain committed to pursuing opportunities that drive value creation.”

The latest developments raise the questions of if and when Delphi might decide to stage an IPO.  Officials from the supplier were initially unavailable to answer questions.

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