Get ready for EBITDAPO

June 28, 2010

What’s the best way to value General Motors as it prepares to go public again? The usual price-to-earnings ratio seems to have lost favor with bankers, as has enterprise value-to-sales, an auto industry favorite. Instead, GM’s advisors are plumping for enterprise value as a multiple of something called EBITDAPO.

That’s the same as regular old earnings before interest, taxes, depreciation and amortization, but with pension costs and other post-retirement employee benefits (OPEB) — healthcare, basically — also stripped out. Using this metric in connection with GM’s planned initial public offering is a reminder that last year’s bankruptcy wasn’t a cure-all.

EBITDAPO is generally reserved for companies in some degree of financial distress. The measure was cited back in 2001, for example, when banks agreed to waive Bethlehem Steel’s loan covenants as it tried to restructure its balance sheet, three months before the firm filed for bankruptcy.

GM is no longer in that kind of precarious position. Last year’s overhaul allowed the automaker to offload billions of debt, including a huge chunk of its healthcare liabilities. That enabled the automaker to post net income of $900 million in the first three months of this year, its first profitable quarter since 2007. But GM didn’t shed all its problems. In the same quarter it shelled out $600 million to cover remaining pension and OPEB costs.

The company is also still on the hook for $8.7 billion of underfunded non-pension costs, most of which is for healthcare. And its pension plans currently suffer from an almost $27 billion shortfall that could require GM to contribute up to $12 billion by 2014 if they remain underfunded, according to the U.S. Government Accountability Office.

These are now just a drag on earnings, rather than a threat to the firm’s solvency. But rather than rush to the IPO market just to help the U.S. government cash out of its shareholding, GM might be better off using any proceeds to pay down some of its remaining legacy liabilities. The sooner GM can do that, the quicker it can shake off the stigma — at least as far as valuation metrics are concerned — of a company that’s still not out of the woods.

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