Puts and Calls: ‘As goes General Motors, so goes the nation’

Tom Karol Occasional Political Commentator
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One year ago, General Motors, once the largest and richest company in the country if not the world, entered into an emergency bankruptcy that cost billions of dollars, eliminated thousands of jobs, closed hundreds of dealerships, ended several product lines, left stockholders and debt holders with huge losses and gave the U.S. Treasury a majority share of the company. Now, some commentators are claiming that the auto rescue has been a success.

When Eisenhower was president there was a saying: “As goes General Motors, so goes the nation.” Assuming this critical link between business and politics remains at some level, let’s look at some recent developments.

The mechanics of paying back the bailout: The government owns 61 percent of GM, which it swapped for about $43 billion that was loaned to the automaker. The United Auto Workers’ health-care trust holds 17.5 percent and the Canadian and Ontario governments hold 12 percent and former debt holders have 10 percent. For that 61 percent to be worth $43 billion, the overall value of GM would have to be $70 billion. The highest market value ever for GM was $60 billion in 1999, when both the market and high profit SUV sales were booming. By comparison, Ford is valued at $41 billion and the market value of Toyota is $116 billion. It will also take the Treasury at least two years to divest all of its GM holdings before the government exits the Detroit automaker. Advisers have said it will require three separate sales with a six-month period between sales.

GM underwriters being interviewed: Last week, GM and Treasury officials met senior officials from Goldman Sachs, Bank of America, Citigroup, JPMorgan Chase and Morgan Stanley in Washington to select choose a lead underwriter for the automaker’s widely anticipated initial public offering as soon as this week. A bank needs to be picked soon in order to prepare for an offering by the fourth quarter, and the Treasury is likely to have more say in the selection than the carmaker itself. Treasury has engaged Lazard Frères to analyze and review alternatives for the government’s ownership stake including giving advice on the use of “underwriters, brokers or other capital market advisers for the best means and structure to dispose of such assets.” The Wall Street Journal estimates that the GM IPO could generate fees of $275 million or more for the Wall Street underwriters.

Will there be a GM IPO in 2010? The Obama administration has made it clear since last year that it wants a fast-track IPO of GM to reduce its majority stake in the automaker. Ron Bloom, the head of the government auto task force wants to “err on the side of getting out a little faster” from the investment. The Obama administration has said it is hopeful GM can make an offering by the end of this year and is eager to shed its stake in the company, though the automaker and the Treasury have stressed that the timing is up to GM. The company doesn’t want to rush the offering and would prefer to address some issues — namely its lack of a company-run finance arm and losses in Europe, the site of clashes with labor and state governments over layoff plans. GM finance chief Chris Liddell said the first-quarter results “aren’t necessarily stable for the rest of the year.”

Europe may be key to a GM IPO: GM’s European sales account for 17 percent of overall GM sales, and GM’s share of the European market slipped to 8.5 percent from 9.0 percent a year earlier, as sales fell to 405,000 from 407,000. GM did report profits last quarter, but Europe was GM’s only unprofitable region. GM’s chief financial officer has hoped that GM could break even in Europe next year with local support. The U.K. has pledged €300 million in loan guarantees and other European countries with Opel factories have also agreed to pitch in. But the German Economics Ministry is not looking favorably on GM’s request for €1.1 billion ($1.35 billion) in federal and state guarantees to restructure its European operations. GM hopes Germany will contribute the most aid, but officials in Berlin Tuesday indicated they may be reluctant to help. After GM reported earlier this month that it had turned its first quarterly profit in three years, the German Economics Minister said GM could afford to turn Opel around without the help of the German government, but he held off the final decision on Opel’s aid request until the end of this week. Add in the present economic woes in Europe, including the dropping euro, and Europe may end up being an even bigger problem for GM and an IPO.