Kerkorian Underestimates GM's Woes

[Perian]

Source: wsj.com

Kirk Kerkorian believes a dividend cut will nurse General Motors back to health. The billionaire investor, who owns 8% of the car company, is underestimating the scale of the problem. The hole in the auto maker's balance sheet may be around $47 billion -- enough to wipe out shareholders, savage its debt and further squeeze workers' benefits.

Start with GM's assets. The vehicle operations are losing money -- $6 billion in the first nine months of 2005. But the world's biggest car marker is worth something, provided the bleeding can be stanched. Assume GM could eventually get operating margins up to 3%. After taxes and on a price-to-earnings multiple of 10, the business would be worth $32 billion. That's nearly triple its current market value.

Then there's GMAC, its finance business, in which it's trying to sell a majority stake. Investors expect it to fetch a multiple of 1.1 times book value, or $25 billion.

Finally, there's GM's cash, at $14 billion in the third quarter. But operating losses and restructuring expenses could consume $8 billion of that this year, leaving only $6 billion. Total it all up and there are perhaps $63 billion of assets.

That sounds nice until one looks at GM's liabilities. If all it had was $32 billion of debt on its balance sheet, it might be OK. But it has three other liabilities: pensions, health care and obligations to workers at Delphi, a former subsidiary in bankruptcy-court protection.

The company just reported a $6 billion surplus in its U.S. pension plans. Netting that off against the $9 billion deficit in its foreign plans might suggest an overall deficit of $3 billion. But that's optimistic. The Pension Benefit Guaranty Corporation estimates it would cost $31 billion to fully fund the pensions. That may be pessimistic. But even taking half that figure would boost the total pension deficit to $18.5 billion.
[A lot of voters: GM workers assemble Pontiac Solstice vehicles in Delaware.]
A lot of voters: GM workers assemble Pontiac Solstice vehicles in Delaware.

Similarly, GM itself admits to only $27 billion in unfunded health-care liabilities. But, again, it's too optimistic. GM expects health-care inflation, currently at 10%, will drop to 5% by 2010. Use a more realistic figure like 8% and GM would be left with a total obligation of $47 billion, even after giving it some credit for its latest cost-crunching deal with its union. Then there's the liability to Delphi workers, which GM says could be as high as $12 billion.

Add it all up and the liabilities come to $110 billion -- $47 billion more than the assets.

How to fill the hole? Unless the value of the assets can be miraculously boosted, the liabilities are going to have to be cut -- in bankruptcy. Shareholders would be wiped out. The bonds and workers' benefits, which rank equally, would be savaged. To balance the numbers, they would each have to take a 43% haircut.

That's more than the 31% hit the bond market is anticipating. It would also be hard to persuade workers to accept benefit cuts of this scale. Politicians may well be tempted to intervene. After all, counting GM's retirees and dependents, a million votes are at stake.

Vice Chairman Robert Lutz this week called talk of bankruptcy "a crock." And in Washington, talk of aid is still taboo.

But the numbers tell a different story.


Article continues at link.

[CRBoyd91]

More doom and gloom...

[chad4835]

I hate the sound of "wiping out the shareholders" I was thinking of getting some of their stock as it is a bargain right now but we lost enough with the techs and I know first hand what it feels like to be "wiped out".

[Cortazzo]

GM will not lose much money this year in operations like it did last year. GM will propably get special treatment in 'fully funding' its pension like the airlines do. It's silly to force the company into chapter 11 just to pay for the pension...

[mjd1001]

Originally Posted by Cortazzo

GM will not lose much money this year in operations like it did last year. GM will propably get special treatment in 'fully funding' its pension like the airlines do. It's silly to force the company into chapter 11 just to pay for the pension...

I don't know about that. IF GM gets it, then Ford will likely get it also (can't think the Govt will give a benefit to one company and not their main domestic competitor who is in similar financial shape).

Add to that the fact that our govt. just let 'slip out' that the deficit for last year is going to be about $50 million more than they projected just a few months ago....and also that the U.S. dollar is starting to crack a bit the last month or so under the weight (primarily) of the current account deficit...and it is going to be very hard for the govt. to be throwing out money to aid GM and/or Ford in a large way.

They may want to do it...but unless somethign changes with the deficit, current account status, or trade deficit, 2006 may be the year that a major adjustment is made in global imbalances economically, in which case our Govt (and us individuals) may be forced to 'tighten the belt' a tad.

[lilredcrvtt]

O.K. things are not exactly stellar in the financial department. We get it. Instead of this focus on "bankruptcy", lets focus on what has been done to stem losses and the positive effect of the new product being rolled out. Yes, time is getting tight, but, there still is time for recovery. The battle is not over, and there is progress forward. Enough with the doom and gloom. G.M. needs positive reporting, not more negative journalism.

[tuxmelvin]

Originally Posted by mjd1001

I don't know about that. IF GM gets it, then Ford will likely get it also (can't think the Govt will give a benefit to one company and not their main domestic competitor who is in similar financial shape).

Add to that the fact that our govt. just let 'slip out' that the deficit for last year is going to be about $50 million more than they projected just a few months ago....and also that the U.S. dollar is starting to crack a bit the last month or so under the weight (primarily) of the current account deficit...and it is going to be very hard for the govt. to be throwing out money to aid GM and/or Ford in a large way.

They may want to do it...but unless somethign changes with the deficit, current account status, or trade deficit, 2006 may be the year that a major adjustment is made in global imbalances economically, in which case our Govt (and us individuals) may be forced to 'tighten the belt' a tad.

$50 million? That will hardly be noticed. Our government hasn't tightened the belt in decades. Even when they "cut" spending they spend more. The government has plenty of money (even if it's borrowed) to do whatever they want.

That said, it's not the job of the government to bail out unprofitable businesses. That's why bankruptcy exists. GM is headed toward bankruptcy whether we like it or not. But we should like it... GM is going to come out of this stronger. It's just going to be a PR nightmare.

[vxl]

Bankruptcy cannot be an option. If GM seeks chapter 11 no one will buy their cars. I know it's not a like-for-like comparison but the most recent bankruptcy in the motor industry was MG Rover in the uK. Their sales dropped 95% overnight never to recover. Chapter 11 is different from bankruptcy in the UK but the effect on customer confidence would not be.

[give_it_all_]

GMI should start limiting how many articles are put up on the same topic again and again!!!!! We all know this stuff, nothing new.

[ethayes]

Don't let the numbers scare you.

GM will take in well over $1,000,000,000,000 over the same 5 year period he speaks of. For every 1% GM is able to keep it is $10 billion. GM's goal is 10 times that with expanding revenue from higher sales around the globe.

Don't take the worst year in GM's life when gas prices skyrocket 300%, medical costs go up 20% and steel goes up 100% and say it will be like this forever.

No it won't.

[GMCtruck]

Originally Posted by ethayes

Don't let the numbers scare you.

GM will take in well over $1,000,000,000,000 over the same 5 year period he speaks of. For every 1% GM is able to keep it is $10 billion. GM's goal is 10 times that with expanding revenue from higher sales around the globe.

Don't take the worst year in GM's life when gas prices skyrocket 300%, medical costs go up 20% and steel goes up 100% and say it will be like this forever.

No it won't.

Is that what your crystal ball is telling you? No one can predict with 100% accuracy how good or bad a company will perform from quarter to quarter, much less five years from now. Maybe GM will have a stellar year in 2006, maybe they won't, but nothing is guaranteed.

[ethayes]

Originally Posted by GMCtruck

Is that what your crystal ball is telling you? No one can predict with 100% accuracy how good or bad a company will perform from quarter to quarter, much less five years from now. Maybe GM will have a stellar year in 2006, maybe they won't, but nothing is guaranteed.

No common sense tells me oil prices can't go up another 300% this year. In fact I see it tumbling.

[ethayes]

The free market brings everything into balance.

1. Investment in alternative fuels is skyrocketing.

2. Investment in existing oil fields and new fields is skyrocketing.

3. The average fuel economy of new vehicles is skyrocketing with a host of new technologies.

4. The cost of alternative fuels is becoming competative.

5. Hydrogen, Hybrid, Ethanol, DOD is coming in the biggest wave in history.

Oil sands, oil shale in the U.S. and Canada all are economically viable for the first time and represent such a vast supply it can't be measures.

Energy cannot be created or destroyed, we can put solar panels up to harness hydrogen energy.

There is one caveat. These technologies may be put on hold again if oil prices come down too quickly. No one things that will happen, not even me.

[TuffG929]

I think we've heard ebough of this crap. I think writers are just using the story to fill the blank space they call their "News" Paper.

[ethayes]

If we took the best year for Ford when they made $25 billion and then looked at their cost obligations over the next decade then the picture will look better.

If we take the worst year for Ford, last year and do it, it looks bad.

Likewise, we can't focus on a single quarter, month, day or year.