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| Detroit sinkhole |
| Antony Currie & Rob Cox / May 30, 2009, 00:01 IST |
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GM restructuring: 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 US government receiving anything close to the sums it will wind up shovelling into the struggling car maker aren’t particularly high.
Uncle Sam is already on the hook for some $20 billion and plans to transfer half of that to a restructured GM balance sheet. Add the rest to the debtor-in-possession financing Washington is to provide for what it hopes will be a short bankruptcy process and taxpayers will be owed at least another $50 billion.
For that commitment, the Treasury expects to wind up owning 72.5 per cent of GM’s equity when it emerges from Chapter 11. The remainder goes to the United Auto Workers union and unsecured creditors — mostly bondholders. The latter will also receive warrants that can give them up to another 15 per cent of the equity as the company’s value increases.
Crudely speaking, for the government’s stake to match the $50 billion in loan commitments, the post-bankruptcy GM’s total equity would have to be worth at least $69 billion — more, assuming bondholders exercise their warrants. This calculation also does not factor in the time value of money.
GM’s market cap only 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 amortisation. That was when low gas prices fuelled profitable SUV sales; GM had eight brands and a massive captive financing business, GMAC, which brought in a third of earnings.
The New GM, as the government is calling it, will only own a sliver of its financing arm. It will have ditched the Pontiac, Saab and Hummer brands. And the New GM is expected to lose control of both its European arm, which had sales of $34 billion last year, and its Latin American businesses.
So, for taxpayers to be made whole, the new mini-GM 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 consolidated debt and preferred stock. Using market valuation multiples of five times profits, that means New GM must generate ebitda somewhere in the order of $19 billion annually.
That would require boosting annual sales to some $150 billion — almost 50 per cent more than the entire company is expected to generate this year — and matching the whopping 14 per cent ebitda margin that Toyota achieved in its best year ever. It requires a vast leap of faith — or an audacity of hope — to believe that can happen.
Of course, the US government is not a professional money manager. The decision before it was not whether to invest either in GM or another business that would generate an acceptable return.
It had to weigh two unpalatable choices: throw taxpayers’ money onto GM’s bonfire in the hope an expedited trip through the Chapter 11 mechanic’s shop would produce a souped-up, successful car maker; or risk having to mop up a bigger mess if a liquidated GM brought the entire US car sector down with it.
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