Can New G.M. Pay for the Old G.M.?
By ANTONY CURRIE and ROB COX
American taxpayers are about to become the majority owners of General
Motors. So it is only fair for them to ask how, or whether, they will
ever recoup their investment. Unfortunately, the odds of the government
receiving anything close to the sums it will wind up shoveling into the
struggling carmaker arenít high.
Uncle Sam is already on the hook for some $20 billion and plans to
transfer half of that to a restructured General Motors balance sheet in
the form of debt. Add the rest to the debtor-in-possession financing
Washington is to provide, and taxpayers will be owed at least another
In return for that commitment, the Treasury expects to wind up owning
72.5 percent of G.M.ís equity when it emerges from Chapter 11, a process
that might take just a couple of months. The remainder goes to the
United Automobile Workers union and to G.M.ís existing unsecured
creditors, mostly bondholders. These creditors will also receive
warrants that can give them up to another 15 percent of the equity as
the companyís value increases.
In crude mathematical terms, for the value of the governmentís stake to
match the $50 billion in sunk loans, G.M.ís total equity after
bankruptcy would have to be worth at least $69 billion and possibly
more, assuming bondholders exercise their warrants. This calculation
also does not factor in the time value of money, which would add another
$1 billion or more annually that taxpayers would need to receive as
compensation for the opportunity cost of tying up their cash.
G.M.ís market capitalization reached around $60 billion back in its
heyday in 2000, when the Motown manufacturer reported about $21 billion
of earnings before interest, tax, depreciation and amortization, a proxy
for operating cash flow. That was a heady time, when low gas prices
fuelled sales of the companyís most profitable S.U.V. models. G.M. had
eight brands then, and a huge captive financing business, GMAC, which
brought in a third of earnings.
New G.M., as the government is calling it, will only own a sliver of its
financing arm, which is also in the process of being propped up by a
government capital injection. It will have ditched the Pontiac, Saturn,
Saab and Hummer brands. And the New G.M. is expected to lose control of
both its European arm, which had sales of $34 billion last year, and
perhaps its Latin American businesses.
So for taxpayers to be made whole, the new mini-G.M. would have to
produce earnings sufficient to support an enterprise value of at least
$95 billion, the sum of a $69 billion market cap and its $26 billion of
debt and preferred stock under the restructuring plan. Using market
valuation multiples of five times that means New G.M. must generate
operating cash flow somewhere in the order of $19 billion annually.
That would require both increasing annual sales to some $150 billion,
almost 50 percent more than the entire company, shorn of its various
financial and international businesses, is expected to generate this
year, and matching the whopping 14 percent operating cash flow margin
that Toyota achieved in its best year ever. It requires a vast leap of
faith to believe that can happen.
Of course, the United States government is not a professional money
manager: It isnít solely motivated by profits, or even by the avoidance
of losses. The decision it faced was not whether to invest either in
G.M. or in another business that would generate an acceptable return.
Both the current president and his predecessor, who first agreed to fund
G.M., had to weigh two unpalatable choices.
They either could throw taxpayersí money into G.M. in the hope an
expedited trip through Chapter 11 would produce a slimmed-down and
successful carmaker. Or they could deny G.M. and risk having to mop up a
bigger mess if its liquidation brought the entire American car sector
down with it.
Taxpayers may be happy with this choice, and with subsidizing G.M. back
to life. But theyíd better hope to get some of their money back, because
if they donít, it would mean the G.M. revamp had failed.
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