What's GM worth?
Taxpayers, the union and bondholders - GM's new owners after bankruptcy
- are eager to find out. But it's uncertain how the market will value a
By Chris Isidore, CNNMoney.com senior writer
Last Updated: May 29, 2009: 7:54 PM ET
NEW YORK (CNNMoney.com) -- Once the bankruptcy process at General Motors
plays itself out, what will the company be worth?
It's more than an academic question of interest only to Wall Street
traders. It will determine how much money taxpayers can expect to recoup
from multiple bailouts of GM. When all is said and done, the Treasury
Department is likely to pump more than $50 billion into GM (GM, Fortune
500) -- including loans made to the automaker last year.
It is also key to determining the level of future health insurance
benefits for hundreds of thousands of GM retirees and how much money
holders of $27 billion on GM bonds, including pension funds and
individual investors, will be able to recover.
GM is widely expected to file for Chapter 11 bankruptcy protection on
Monday. As a result, the government, bondholders and a trust fund
controlled by the United Auto Workers union will wind up owning
virtually all the stock in a reorganized GM. (Current GM shareholders
will essentially have their holdings wiped out through bankruptcy.)
So taxpayers, retirees and bondholders need for shares of a new, leaner
GM (GM, Fortune 500) to start trading for them to stand any chance of
benefiting from the company's emergence from bankruptcy. Unfortunately,
these new owners probably won't know until at least 2010 just how much
money, if any, they will recover.
GM's most efficient plants, dealerships, brands and other assets could
exit bankruptcy within two to three months.
However, it will take at least 6 to 18 months for the bankruptcy court
to wade through the company's unprofitable plants, most of its debts and
other liabilities, according to a senior Obama administration official.
During that time GM stock is unlikely to be publicly traded.
But even once shares of GM do begin trading again, it's highly uncertain
what the company could be worth.
$25 billion: too high or unreasonably low?
According to a filing by General Motors late last month, the company
estimated the equity value of its common stock would be about $25
billion once it completed a reorganization.
That's substantially higher than the market value of about $450 million
that GM was worth based on Friday's closing stock price of just 75 cents
a share. But the last time GM was worth as much as $25 billion was late
A new company, with a greatly reduced debt burden, fewer plants and
lower labor costs, could end up being an attractive investment. But auto
analysts and other experts are reluctant to speculate on exactly what
GM's value could be following bankruptcy.
Len Blum, managing director of Westwood Capital, an investment bank,
said he thinks there's a better chance for taxpayers to recover money
from their investment in GM than with insurer AIG. Taxpayers also have a
majority stake in that company, and the government has kicked in more
than $180 billion so far to keep AIG afloat.
Blum said that given the reduction in GM's debt level and operating
costs that are being planned, there could be "some real value" in a new
GM,but that there was still great risk for all shareholders.
"If it was a slam dunk, the union would have wanted more common equity,"
he said. The UAW wound up agreeing to a 17.5% stake.
Other experts question whether cost cutting and a lower debt load are
enough to make the company attractive to investors, even if it they
enable GM to earn its first profit on its auto operations since 2004.
"Back in 2007 GM was being valued on its future prospects and its
assets, not its profitability," said Chris Jadro, an equity strategist
focusing on distressed companies for Jefferies & Co. "But it's just hard
to imagine that GM will be worth what it was a year ago coming out of
this down cycle."
The two biggest shareholders of the new company also expressed doubts
about how quickly the stock will recover.
A senior Obama administration official speaking to reporters Thursday
conceded it is unlikely that the government can get back its entire
investment in GM. The official said the government hopes "to recover as
many taxpayer dollars as we can," and that it expects to sell the shares
as soon as possible.
UAW President Ron Gettelfinger, who also said he would like to sell the
union's stake in GM as soon as possible to have money available in the
trust fund, downplayed expectations about the company's value going forward.
Although he said Friday that the union believes "the stock should be
worth a lot more a lot quicker," he added that "right now, we realize
the value is zero."
Some auto industry experts believe that the changes made by GM could
position it for a level of profit it hasn't earned in decades. David
Cole, chairman of the Center for Automotive Research, said GM is
well-positioned for even a modest rebound in industrywide sales.
Carr said the $25 billion market value estimate "is pretty reasonable
and it could even be conservative." He said that profits for GM and the
rest of the industry could be robust in the next few years due to
reductions in capacity and pent up demand for autos.
But a number of experts doubt that GM's market value will get anywhere
near the $25 billion figure in the next few years. They point out that
GM will face a difficult competitive position compared to cash-rich
Toyota Motor (TM) and even U.S. rival Ford Motor (F, Fortune 500), both
of which could pass it in terms of U.S. sales in the coming years as GM
sheds brands and dealers.
Sean Egan, managing director of rating agency Egan-Jones Group, said
he's not sure GM can generate a profit even with all the cost
concessions they've received from the union.
"In almost every competitive front, GM is being beaten. People who see
strong profits for GM are being delusional," Egan said.
But Susan Helper, an economics professor at Case Western Reserve
University in Cleveland and expert on the auto industry, worries that
even if GM does return to profitability following bankruptcy, investors
could penalize the stock due to the company's previous problems and
doubts about its future.
"It's tough to see there being a line of investors looking to get into
the stock," Helper said.