Interesting
opinion from today's WSJ on GM's financial woes and potential BK...
Kerkorian Underestimates GM's Woes
Liabilities Are Adding Up,
Assets Can't Fill the Gap;
Dividend Cut Won't Cut It
January 14, 2006; Page B14
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.
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.