They can’t name the price or the buyer, but a day after heading into bankruptcy General Motors was finally able to say it was selling what is arguably its biggest albatross: Hummer.OK, “sell” might be too strong a word, since all they have is a memorandum of understanding. But they said the deal should close by the third quarter, save more than 3,000 U.S. jobs, and see the Hummer get a big investment infusion.In early April, three bidders were in the running for Hummer, and none were automakers. While private equity was said to be among the interested parties, it’s probably a safe bet that Cerberus – the owner of bankrupt Chrysler – is not among them.With the price of gas rising again, and the Hummer the poster-car for the age of excess, the buyer may want to stay anonymous for some time. Maybe as long as it takes to design an environmentally friendly engine for the off-road behemoth. One powered by hamsters would have the added benefit of a catchy new name.
So, it has come to pass. General Motors, ultimate symbol of the world’s greatest car-owing democracy, is to end up in state hands. Henry Ford might have said history is bunk but it is still humbling for all Americans to see Ford’s great rival rescued by the Government, wiping out most bondholders and shareholders. What happens next?
This deal, with its maze of myriad related smaller transactions, has been all about vested interests. The Government would be forced to support workers made redundant if the business was not saved. Banks would take a harder hit. And suppliers, such as Magna, GM’s biggest, rely on the business continuing to save their own significant workforces.
That leaves little left for investors. In theory chapter 11 should allow GM to focus on how to cut its cloth, free of such parties desiring a quick return on their investment. GM might then become a leaner machine, better able to cope with the tougher economic outlook. Can the Obama administration make the necessary cuts to achieve this?
What’s not-so-surprising: GM needs cash. Again.
Talks that ran all through Wednesday night to sell Opel to one of four final bidders narrowed the race to two but failed in sealing a deal. German ministers, emerging in the early hours of Thursday morning after more than 12 hours of talks, blamed GM and the U.S. Treasury for the failure.
Why? Because GM, the ministers say, shocked participants by announcing it needed 300 million euros ($415 million) more in short-term cash from the German government to keep Opel operating.
Holders of $27 billion of General Motors‘ unsecured debt have until midnight tonight to decide whether to exchange it for equity, and the chance that the once mighty auto giant will get the 90 percent participation it says it needs to avoid bankruptcy protection is looking just as remote as it did a week ago.
Based on its assets at the end of the first quarter, GM’s filing would be among the biggest U.S. bankruptcies ever, and could be one of the trickiest to work through among the myriad interested parties. Of key interest to markets is how much TARP money GM might need for DIP financing. GM cleared a key obstacle in its restructuring last Thursday when it reached a sweeping deal on concessions with the United Auto Workers. Canada’s union also says it is on board.
There are two big problems with leveling charges of obstructionism and intransigence at the thousands of GM bondholders. It’s a diverse group, so expecting a unified voice would be a stretch in any case. There are those who argue that all GM investors are being hurt and creditors shouldn’t expect to be spared. The problem is that the deal brokered with Obama’s task force attempts to save at least part of the company from an outright bankruptcy, preserving better assets for a new and improved company that bondholders would then own. Such a solution keeps bond holders from being able to sell them off for their pennies on the dollar. Instead it lumps them in with shareholders, but with none of the upside equity investors get for their risk.
With GM‘s share price heading toward $1 and Chrysler close to consummating its shot-gun wedding with Fiat, Ford‘s raising $1.4 billion through the sale of 300 million shares puts some serious distance between it and the competition.
Having gone this far into the recession without government aid, Ford is making a big show of going green, consolidating its dealer networks and taking the kind of cost-cutting steps that GM is being chased into by the government and that Chrysler is hoping for from its merger with Italy’s Fiat.
If the restructuring moves weren’t enough, Ford chief Alan Mulally (smiling and clapping, left) made sure to hit the right PR notes when detailing how the fresh cash would be used: possibly funding a larger portion of Ford’s retiree obligations.
Under the bondholders’ deal, they would swap a 51-percent stake in a restructured company for $27 billion in debt, a person with knowledge of the plan tells Reuters Detroit Bureau Chief Kevin Krolicki. The deal would give the United Auto Workers union 41-percent in a new General Motors while the U.S. government would not receive an equity stake, according to the person who asked not to be named because the offer had not yet been submitted.
A committee representing GM bondholders will present the alternative plan to the White House task force overseeing the restructuring of GM and Chrysler later today, the person said. GM said this week it was moving ahead with a plan to offer existing bondholders a 10-percent ownership of the restructured automaker. Under the GM plan, the US government would own a combined 89-percent of the new company.
GM Chief Executive Fritz Henderson said on Monday the automaker would file for bankruptcy if bondholders did not swap out of 90-percent of the $27 billion they are owed.
Chrysler’s biggest lenders and the U.S. government reached a breakthrough framework deal to cut the automaker’s debt by $6.9 billion, but officials say bankruptcy is still a strong possibility with the Obama administration’s Thursday deadline for a comprehensive rescue plan just hours away.
Fiat Chief Executive Sergio Marchionne was quoted by the president of the Canadian Auto Workers union as saying Chrysler would likely enter Chapter 11 bankruptcy for a period of time. But Michigan Senator Carl Levin said, “If they do go into bankruptcy, it would really be in and out.” A source with senior-level knowledge of the restructuring told us that a surgical bankruptcy could be a way, for instance, to address “recalcitrant” lenders.
With Germany’s Daimler AG dumping its 19.9 percent stake in Chrysler and Italy’s Fiat poised to “eventually” own more than a third of the company, European know-how and innovation have never been more important for the U.S. auto industry.
With just days left to complete deals to slash labor and debt costs or face bankruptcy, Chrysler has won union concessions aimed at paving the way for a deal with Fiat and the U.S. government to save the privately held automaker. The UAW said that deal must be ratified by Wednesday and meets conditions mandated by the Treasury as part of an emergency loan program for Chrysler. Treasury’s deadline is Thursday.
“The patience, resolve and determination of UAW members in these difficult times is extraordinary, and has made it possible for us to reach the agreement we will present to our membership,” UAW President Ron Gettelfinger said in a statement. The UAW represents about 26,800 Chrysler workers in the United States. The company also has a contract buyout offer on the table for those workers, which expires today. GM is expected to announce a fresh round of cost cutting later this morning.
The U.S. Treasury was expected to make a new debt restructuring offer to Chrysler’s lenders, who are owed $6.9 billion, as soon as today. Attention has shifted back to creditors. Whether they will show patience, resolve and determination remains a question. Whether doing so will produce a deal is an even bigger one.
This week’s mega-bankruptcies by mall operator General Growth Properties and Canadian newsprint company AbitibiBowater, have put 2009 well on its way to being the worst ever for filings, according to a report released Thursday by research firm BankruptcyData.com.
General Growth had pre-bankruptcy assets of $29.6 billion, overtaking chemical maker Lyondell Chemical as the biggest bankruptcy of the year so far. While far behind, AbitibiBowater is no slouch, with $10 billion.
According to BankruptcyData.com, these new entrants in the bankruptcy sweepstakes bring to 79 the number of bankruptcies by public companies this year, with total assets of $145 billion, 69 percent ahead of the pace of 2002, the worst year ever. Measured by the number of filings, 2009 is on pace to best 2001′s record bloodbath of 263 bankruptcies in a year, according to BankruptcyData.com.
It may be a raucous bit of speculation gone awry, but reports in Italy that Fiat is angling to pick up General Motors’ Opel operations in Europe if the Chrysler deal falls through are too good to dismiss out of hand.
The denial from Fiat’s Chairman, Luca Cordero de Montezemolo, left a little room for intrigue in its dramatic flair. “They’ve written about it in the newspapers? No, no,” he told reporters. Fiat shares raced higher in relief. “Opel is linked to GM and Fiat has already got out of that,” said a Milan dealer, referring to a previous partnership. “Plus, it (Opel) is a clunker. Heaven forbid!”
Meanwhile, over at Chrysler, Chief Executive Bob Nardelli has been telling it like it will be. In an internal memo to staff, he said the company would cede control of its board, and ultimately senior leadership, if it completes the planned Fiat alliance. Given the Fiat deal is for only a fifth of Chrysler initially, rising eventually to 35 percent, that might seem odd. Then again, it’s the U.S. auto sector we’re talking about.