GM Means Government Motors
Kurt Brouwer May 27th, 2009
With the pending bankruptcy or rescue of GM, the U.S. government will own up to 70% of the company. That’s right, 70%. Of course the tab for that equity stake will be very high as this post from the Wall Street Journal’s Deal Book blog indicates:
…Consider this extraordinary fact: The U.S. government is likely putting up to $50 billion in new money to back the company’s bankruptcy reorganization, according to people familiar with the plan.
…It’s clear that a large portion of this amount will be secured with the equity of the “new GM.” Why is the government likely to get equity and not, say, debt with interest and a repayment schedule? Because too much debt would apparently make the company unviable. It’s as if the government has devised an SAT exam for GM, and is blatantly funneling the company the answers.
Okay, fine. So what will this equity be worth?
That’s anyone’s guess. By the logic of some of the people who know the company best – its own unionized workforce – the bet is that it won’t be worth much.
Remember that the union just agreed to take a relatively small portion of its health-care trust in GM equity. The rest will be funded via annual payments on preferred stock. In other words, UAW’s view of the future is clear: Cash today over equity value tomorrow.
…Put it all together and the government will own an extraordinary 70% of the company.
…What began as a temporary “bridge loan” has become a free-money bonanza with no historic precedent.
Update:
Bloomberg reports that GM bondholders rejected the equity swap offer and this means a bankruptcy filing is likely [emphasis added]:
A General Motors Corp. bankruptcy filing became almost certain after the 100-year-old automaker failed to persuade enough bondholders to take equity in a streamlined company in exchange for $27 billion of debt.
The debt-for-equity swap offer by GM, the world’s largest automaker until its 77-year reign ended last year, failed to win the required 90 percent approval of bondholders by the time it expired last night. The proposal was part of an effort by the Detroit-based automaker to cut its debt by $44 billion before a June 1 deadline in order to qualify for more bailout loans…
And that — qualifying for more bailout loans — is the most critical factor in GM’s financial situation, which just points out that GM really is Government Motors.
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