The GM Plan

[Tilted]

Pontiac brand to be phased out.

Dealerships to be reduced from 6,246 to 3,605 (good luck with that, it's going to be a legal nightmare).

Operating plants to be reduced from 47 to 34.

Hourly workforce to be reduced from 61,000 to 40,000.

Offering 225 shares of GM for each $1000 owed to bondholders. Bondholders accepting this offer would get no cash repayment on any of the debt they are owed, instead having it all converted to equity in the company at a rate of $4.44/share (it is currently trading around $1.80/share). Of all the players involved in this situation, they are being asked to take the largest screwing - by far. They hope to get get about 90% of $27.2 Billion worth of bond debt eliminated through this offer.

The UAW pension funds are being asked to convert 50% of what they are owed to equity in the company (although I haven't seen an exchange rate specified).

And, it looks like the government will convert $5 Billion worth of the money that it is owed to equity in GM. I haven't seen details on this yet - hopefully they will be forthcoming soon. But, that would mean that we don't get all of the money we LOANED them back - instead we ACTUALLY would purchase a portion of the company. Congratulations everyone, despite all the previous not-quite-accurate rhetoric to that effect, you may soon actually own a significant portion of GM.

GM plans deep plant, job cuts | Reuters

 

[Larry Gude]

Not a peep about wages or benefits?

 

[Tilted]

I think it is particularly suspicious that they specified the rate at which bondholder debt would be converted to GM equity, but did not specify the rate at which UAW debt and government debt would be converted to GM equity. Is it going to be at a different, much more attractive rates?

This is particularly noteworthy because some of the numbers being reported don't add up.

Existing shareholders are said to be losing all but 1% of the equity in the company (no problem there, they really should lose everything). The bondholders are said to be getting 10% of the equity in the company (around 6 billion shares) in exchange for $27 Billion or so in debt.

Where is the rest of the equity? Is the UAW getting a larger share of equity in return for a smaller portion of debt (about $10 Billion)? Is the government getting a larger share of equity in return for a smaller portion of debt (perhaps about $8 Billion)? Are preferred shareholders being asked to convert to common equity? I've not seen that reported, and even if they were, it shouldn't account for anything near 90% of the company's equity. What accounts for the disparity - is it just loose and misleading reporting of the equity shares?

Something isn't adding up - either the numbers being reported aren't accurate, or they are hiding something. Why were they vague about the exchange rate for the UAW debt and the government debt, but specific about the exchange rate for the bondholder debt?

 

[Tilted]

Not a peep about wages or benefits?

Vague comments about reducing them. A lot of that was already sorted out (although the reductions were probably not aggressive enough). At this point, they are mostly talking about efforts to address solvency issues.


EDIT: Other than the dealership, plant, and employee reductions - those would address on-going operational viability issues. But, there isn't a lot of current talk about the specifics of wage and benefit reductions for current employees.

 

[Pete]

What are the odds they can abandoned the defined retirement plan and go with a 401K like the rest of us?

 

[Tilted]

I think it is particularly suspicious that they specified the rate at which bondholder debt would be converted to GM equity, but did not specify the rate at which UAW debt and government debt would be converted to GM equity. Is it going to be at a different, much more attractive rates?

This is particularly noteworthy because some of the numbers being reported don't add up.

Existing shareholders are said to be losing all but 1% of the equity in the company (no problem there, they really should lose everything). The bondholders are said to be getting 10% of the equity in the company (around 6 billion shares) in exchange for $27 Billion or so in debt.

Where is the rest of the equity? Is the UAW getting a larger share of equity in return for a smaller portion of debt (about $10 Billion)? Is the government getting a larger share of equity in return for a smaller portion of debt (perhaps about $8 Billion)? Are preferred shareholders being asked to convert to common equity? I've not seen that reported, and even if they were, it shouldn't account for anything near 90% of the company's equity. What accounts for the disparity - is it just loose and misleading reporting of the equity shares?

Something isn't adding up - either the numbers being reported aren't accurate, or they are hiding something. Why were they vague about the exchange rate for the UAW debt and the government debt, but specific about the exchange rate for the bondholder debt?

They are now reporting that the UAW funds would get 39% of the equity - four times as much equity for less than half as much debt. What a load of BS. This is a complete screwing for the bondholders, and I hope they refuse the offer in mass - let it go to court. They'll get screwed there also, but at least they won't be supplying the lubricant themselves.

So, now the question is - there is 50% equity left out there - is that going to the federal government? Are they offering it to secured debt holders (I highly doubt that)?

 

[Pete]

They are now reporting that the UAW funds would get 39% of the equity - four times as much equity for less than half as much debt. What a load of BS. This is a complete screwing for the bondholders, and I hope they refuse the offer in mass - let it go to court. They'll get screwed there also, but at least they won't be supplying the lubricant themselves.

So, now the question is - there is 50% equity left out there - is that going to the federal government? Are they offering it to secured debt holders (I highly doubt that)?

If they underfunded the UAW retirement or it was screwed in Bankruptcy court wouldn't the PBGC have to step in and make up the difference thus screwing the taxpayers directly 100% instead of indiectly partially?

 

[Tilted]

If they underfunded the UAW retirement or it was screwed in Bankruptcy court wouldn't the PBGC have to step in and make up the difference thus screwing the taxpayers directly 100% instead of indiectly partially?

With the way we do things - yes, one way or another the government would probably step in and pay the tab instead of expecting the UAW beneficiaries to take benefits that aren't quite as good.

When it's all said and done, we are gonna find out that what happened here is that the U.S. government bought half of GM for $8 Billion. And, they forced many of GM's major creditors to take a major screwing, so that the price they paid was cheap. I said it at the time - but, effectively, all of the money we loaned GM was money being stolen from the bondholders. The government's behavior in this whole saga has been reprehensible.

So, after we own a significant portion of GM, can we trust the government not to take actions to unfairly disadvantage its competition? Will it find a way to screw Ford, Toyota, Honda, etc.?

 

[Tilted]

There are some delusional people trading (buying) GM stock today. It is trading up to over $2/share.

According to GM, there are 2 possibilities here:

(1) The bondholders don't accept this deal and the company ends up going through some form of bankruptcy. Most likely that means a share of GM stock is worth $0.

(2) The bondholders do accept this deal. That means GM stock is diluted by a factor of 100. At $2+/share, that would value GM at more than $100 Billion - absolutely, no way. Their book value, even with the $40 Billion in debt relief, will still be negative. Their earning ability? There is no way it is great enough moving forward to justify a $100 Billion market cap, especially in light of the negative book value. Add to that this reality - you are looking at a company, 90% of which will be owned by the U.S. government and the UAW. Think about that - will the actual company ever be profitable - or will it be run in a way that primarily benefits its majority owners? Won't it look out for the UAW, and the political interests of the government, in sharp contrast with what is in the interests of its other shareholders?

A lot of people are saying that the bondholders would be fools to turn down this offer, because they will get very little through a GM bankruptcy. I say those people are crazy - they would be fools to take it. How much will 10% of GM be worth - a GM that is run by the U.S. government and the UAW? The company would need to make $40 or $50 Billion in profits just to have a book value of $0. And, it will be a while before they show any profits, if they ever do.

 

[Larry Gude]

Their earning ability?

As I understand this, GM loses about $2,000 per car sold, on average and that's when things were going fairly well industry wide, what, 17 million cars a year or so sold in the US. As I understand this, all their input costs are comparable to their competitors save one; labor and benefits.

As I understand this 'deal' all we're talking about is moving asset and liability numbers around which is fine for the balance sheet but does not in any way address the #1 primary problem; they are not selling vehicles at a profit.

Correct me if I have that wrong.

 

[Pete]

The bondholders would only take a loss if they immediately sold the common stock right? If they held it hoping it would appreciate they could end up making out?

 

[Larry Gude]

The bondholders would only take a loss if they immediately sold the common stock right? If they held it hoping it would appreciate they could end up making out?

Making out or recovering loss?

 

[Pete]

Making out or recovering loss?

It could be. If the stock they swap the debt for appreciates to a value more than what they would have gotten if the bond had matured then they made out.

If the stock appreciated to a point they made exactly what they would have if the bond had matured they did ok.

If the stock appreciated to the value of the money loaned to GM without any interest on the bond they broke even.

Of course if the value stagnates at $1.50 a share they take a loss of 66%

 

[Larry Gude]

It could be. If the stock they swap the debt for appreciates to a value more than what they would have gotten if the bond had matured then they made out.

If the stock appreciated to a point they made exactly what they would have if the bond had matured they did ok.

If the stock appreciated to the value of the money loaned to GM without any interest on the bond they broke even.

Of course if the value stagnates at $1.50 a share they take a loss of 66%

Right, but what I am arguing is that, absent making a profit on their products, they can't payoff debt and there is no rationale for the stock to appreciate.

Or am I missing something?

 

[Tilted]

As I understand this, GM loses about $2,000 per car sold, on average and that's when things were going fairly well industry wide, what, 17 million cars a year or so sold in the US. As I understand this, all their input costs are comparable to their competitors save one; labor and benefits.

As I understand this 'deal' all we're talking about is moving asset and liability numbers around which is fine for the balance sheet but does not in any way address the #1 primary problem; they are not selling vehicles at a profit.

Correct me if I have that wrong.

Off the top of my head, I can't verify the $2,000/car average loss - but it sounds about right. If anything, they probably lost more than that per vechicle sold in 2008.

As for current labor/benefit costs - they have largely gotten them in line with the likes of Toyota (American production). They've been able to get significant concessions from the UAW, and the more time that goes by, the less that will be an issue. Cutting a lot of the fat (eliminating Pontiac, idling plants, laying off a third of the hourly workforce, closing 40% of the dealerships) will also help their operational profitability. IF they can build quality products that the market wants, they may eventually be able to make money now. But, as I said, their problem is that they will be run by the UAW and the government. Will those enitities be interested in having the company make a profit, or will they have other agendas?

 

[Pete]

Right, but what I am arguing is that, absent making a profit on their products, they can't payoff debt and there is no rationale for the stock to appreciate.

Or am I missing something?

Good point BUT if you look back at Wall Street's history a companies perceived health means very little. It seems that about the time that average people gained the ability to buy and sell stocks via discount brokers any semblance of logic went away.

For example, if I recall correctly Amazon.com didn't make a profit for 6 or 7 years and it still traded at a premium and had a PE ratio in the stratosphere. Look at your favorite commodity oil. No reason at all for it to be $150 a barrel, it was all emotion and pure speculation.

 

[Tilted]

The bondholders would only take a loss if they immediately sold the common stock right? If they held it hoping it would appreciate they could end up making out?

That's my point though, I don't think this company will be worth much going forward - at least not for a very, very long time.

(1) The stock shares will be diluted by a factor of 100. As the deal is currently designed, GM would have to be valued at about $250 Billion in order for them to fully recover the value of the debt they hold. None of them have expected to be able to do that, but I think the company would currently be overvalued at a $25 Billion market cap. That would only give them 10% of what they are owed.

(2) This company is still significantly in the red. Even with taking this debt off the books, their liabilities still exceed their assets by around $50 Billion. By the end of this year, that number might be $70 or $80 Billion. It may reach $100 Billion before they reach profitability again - if they ever do.

(3) The company will be owned - thus controlled - by the UAW and the U.S. government. What is the likelihood that it will be run as a profitable company?

Just for perspective - the most money that GM has ever made in a year is about $7 Billion. That was in the late 90's when the economy was booming and they had a much greater market share than they will ever have again.

 

[Pete]

That's my point though, I don't think this company will be worth much going forward - at least not for a very, very long time.

(1) The stock shares will be diluted by a factor of 100. As the deal is currently designed, GM would have to be valued at about $250 Billion in order for them to fully recover the value of the debt they hold. None of them have expected to be able to do that, but I think the company would currently be overvalued at a $25 Billion market cap. That would only give them 10% of what they are owed.

(2) This company is still significantly in the red. Even with taking this debt off the books, their liabilities still exceed their assets by around $50 Billion. By the end of this year, that number might be $70 or $80 Billion. It may reach $100 Billion before they reach profitability again - if they ever do.

(3) The company will be owned - thus controlled - by the UAW and the U.S. government. What is the likelihood that it will be run as a profitable company?

Just for perspective - the most money that GM has ever made in a year is about $7 Billion. That was in the late 90's when the economy was booming and they had a much greater market share than they will ever have again.

Very true, in addition with most of the shares being held by the government and the UAW there will be very low volume which would kill its chances at climbing.


Do they have any holdings that they could liquidate?

 

[Tilted]

Of course if the value stagnates at $1.50 a share they take a loss of 66%

If this deal goes through as proposed, GM will be a penny stock when it does. I have no idea what people who are buying it today are thinking - they are obviously hoping for a third scenario that isn't on the table at this point.

 

[Pete]

If this deal goes through as proposed, GM will be a penny stock when it does. I have no idea what people who are buying it today are thinking - they are obviously hoping for a third scenario that isn't on the table at this point.

Which goes right to my point there is no logic in equity trading anymore.