With GM’s share price slipping below $30, the cries are going up again around the internet about the government’s stake in the bailed-out automaker. Thus far the Treasury has remained mum on its exit strategy, only indicating that it would emphasize speed rather than maximum return as it charted the course for its sell-off. But now, Reuters reports that “a big chunk” of the government’s 33% remaining stake in GM could be sold “in the summer or fall.” With the government’s shares “locked up” until May 22, that could mean the government is bailing as quickly as possible at a time when GM’s stock is hitting post-bankruptcy lows, and its CEO offers little in the way of explanations beyond blaming the Japanese tsunami and rising fuel prices. The Wall Street Journal figures taxpayers would lose $11b on its “investment” in GM equity if the government sold at today’s prices (the stock must hit $53 for break-even), but reports that political motivations outweigh fiscal considerations. The White House does not want “Government Motors” to be an issue in the next election.
Exactly a week ago, Fiat said it would up its stake in Chrysler “within weeks,” and according to the Detroit News, the deed is now done. Having earned 5% of Chrysler’s equity by building a FIRE-family engine in the US (for use in the Mexico-built Fiat 500), Chrysler had to confirm that it has brought in $1.5b in non-NAFTA foreign revenue, and (according to Chrysler’s LLC agreement [PDF])
[execute] one or more franchise agreements covering in the aggregate at least ninety percent (90%) of the total Fiat Group Automobiles S.p.A. dealers in Latin America pursuant to which such dealers will carry Company products
in order to bring its stake up from 25% to 30%. We already know that Fiat will achieve this goal by rebadging Chrysler vehicles as Fiats for Latin American markets, a move that is technically compliant with the letter (if not the spirit) of the LLC agreement. But, it turns out that Fiat still had to get the Treasury to amend its agreement in order to bend the rules just a little bit more.
Yesterday’s release of the Congressional Oversight Panel report on the auto bailout pointed out several fundamental problems with the government’s intervention in the auto industry, all of which stem from what the report termed the “mutually exclusive” goals of the Treasury in overseeing its investment in the industry. But that report focused entirely on the post-bailout management decisions by Treasury, ignoring the decisions made during the bailout itself. And though the White House has, in recent months, redefined its goals in bailing out GM and Chrysler to focus on the improved financial performance of the bailed-out automakers, this is clearly a recent recalibration of its political message. As I pointed out in my latest New York Time Op-Ed,
what Mr. Obama called his “one goal” — having Detroit “lead the world in building the next generation of clean cars” — is nowhere near being achieved.
And, as it turns out, the Administration’s actions in the bailout will inevitably come up well short of that goal in at least one important respect.
Read More >
The Congressional Oversight Panel, which oversees the TARP program on behalf of the legislative branch, has released an update on the auto bailout [full PDF here] acknowledging the successes of the government intervention, while airing a number of important concerns. As has been typical of mainstream media coverage of the auto bailout, the good news has already been well-reported. The report, for example, notes that the bailout brought GM and Chrysler’s capacity utilization up, labor costs down, and allowed them to “[start] to reverse” their decades-long declines in market share. Furthermore, estimated government losses on the bailout have been halved, from $40b to $19b. The report’s summary concludes
While it remains too early to tell whether Treasury‟s intervention in and reshaping of the U.S. automotive industry will prove to be a success, there can be no question that the government‟s ambitious actions have had a major impact and appear to be on a promising course. Even so, the companies that received automotive bailout funds continue to face uncertain futures, taxpayers remain at financial risk, concerns remain about the transparency and accountability of Treasury‟s efforts, and moral hazard lingers as a long-run threat to the automotive industry and the broader economy.
Which brings us to the concerns that have received considerably less media attention…
One of the more admirable qualities of the blogging culture is a relentless underdog streak. Anyone who mans the ramparts of a decent blog is forever scouring the worlds of business, media and opinion for an opportunity to attack the most prominent voices of the day. And TTAC is no exception: we certainly came up by attacking the apologists and Polyannas who are still massively overrepresented in the world of automotive commentary. But what a difference a bailout makes. While the mainstream automotive media spent much of the leadup to the auto bailout making apologies and excuses for Detroit’s decline, TTAC told the unpleasant truth, gaining us new readers and credibility every step of the way. Now that I find myself being asked to contribute to one of the most prestigious opinion outlets in the world (the NY Times op-ed page) on a regular basis, TTAC is no longer the underdog, and other blogs have stepped into the breach to attack us as the new status quo. Fair enough… let’s do this thing.
According to our latest sales data, the Detroit Three have enjoyed something of a comeback relative to the “foreign” competition this year. And though it’s not clear how long that trend will last, the media is catching the Detroit-boosting bug again. The NYT’s Bill Vlasic epitomizes the mood, focusing on improvements in GM and Ford’s products in a piece titled American Cars Are Getting Another Look. Between IQS score improvements and anecdotal evidence of consumer interest in Ford and GM’s “gadgets” and “value,” Vlasic’s sidekick, Art Spinella of CNW Research, forwards an interesting theory for the death of the “perception gap” (a construct he helped create, by the way):
Ford has become almost the ‘halo brand’ for G.M. and Chrysler. Because of Ford’s success, people are less resistant in general to considering all of Detroit’s products.
Well, that’s not the dumbest thing ever said about the destruction of the perception gap… but it sure is a head-scratcher. Did Nissan and Honda just spend the last several decades skating by on Toyota’s sterling reputation (RIP)? Still, it might be interesting to hear Ford’s perspective on all this.
Now that GM’s acquisition of the subprime lender AmeriCredit has had 24 hours to sink in, howls of protest are starting to surface. The charge is being led by Senator Chuck Grassley, who has requested a review of the deal from the SIGTARP, saying
If GM has $3.5 billion in cash to buy a financial institution, it seems like it should have paid back taxpayers first. After GM’s experience with GMAC, which left GM seeking a taxpayer bailout, you have to think the company and, in turn, the taxpayers would be better off if GM focused on making cars that people want to buy and stayed clear of repeating its effort to make high-risk car loans.
And though Grassley’s criticism could be read as mere partisan gamesmanship from a leader of “the party of no,” there are a number of very good reasons for opposing the deal.
After ending the first quarter of this year with $35.7b in cash and equivalents, GM was in the best position it’s enjoyed in decades. And yet, with an IPO prospectus looming, The General is seeking a $5b line of credit and trotting out EBITDAPRO as its in-house measure of financial success. Both of these tactics are hallmarks of companies that are doing poorly, and GM has already learned how problematic loading up on debt and sliced-and-diced financials can be. So why is The General inviting criticism from outlets like Edmunds Autoobserver, which characterizes GM’s push towards an IPO as the rebirth of old bad habits? The simple answer: “business execution.” In other words, GM may have a lot of cash, but it’s got nearly as many demands on its resources as well… and these cash drains hardly add up to a coherent strategy.
Despite having more cash than debt for the first time in decades, GM is going back to Wall Street in search of fresh debt. Over the weekend, The General has been in talks with several banks to secure a $5b revolving line of credit to shore up its liquidity position ahead of an IPO that’s rumored to take place in August. At $5b, GM’s desired line of credit would essentially replace the $5.8b the automaker has repaid to the Treasury, and will help it deal with a number of pressing cash needs to maintain its shaky global empire. But with so many pressing uses for the cash, and political pressure mounting for a rapid IPO, can GM deal with its issues and take on more debt and be worth what the government wants it to be worth? Troublingly, the answers to these questions are not to be found on GM’s balance sheet.
One might believe that GM’s forthcoming IPO marks the second coming of Christ. GM, once the world’s largest corporation, faced oblivion in the winter of 2009. The train wreck of this former company reemerged from burial last summer through the generosity of the US and Canadian taxpayer as a new company shorn of most of its former financial liabilities, unproductive assets, and brands it no longer could support. Everything that Jerry York (R.I.P.) told the automotive world in January 2006 that GM needed to do to survive back then finally came to pass. And now, it’s preparing an IPO to swap ownership from the governments to the public. Ed Whitacre and his team will get the credit for a most remarkable turnaround while Obama will bask in the light of his stewardship of public monies. Let’s get the story straight.
GM’s government-installed Chairman/CEO Ed Whitacre hasn’t been wildly popular with Detroit insiders, earning dismissive raspberries from more than a few corners of the industry’s peanut gallery. But now that his reign of executive terror is over, Detroit seems to be learning how to stop worrying and love the former AT&T man. As Whitacre prepares for his first visit to Washington DC as head of GM, the local media and other members of “Team Detroit” are making their peace with Whitacre. So what lies beneath the new united front?
Opel’s Nick Reilly is casting worried glances towards Berlin and Brussels. What he hears from there makes him double his Maalox dosage. Or pop some local Rennies, if the heartburn meds are in short supply at the Apotheke in Rüsselsheim. Which they undoubtedly are. Nobody wants to help Reilly. Berlin doesn’t want to. Brussels doesn’t want to. Even Opel’s own auditors are no help. This tale would be better told by Kafka. He’s dead. I’ll try. Read More >
As time goes on, Opel’s chances to be rescued by an outside investor are dwindling. A member of the German government’s Opel Task Force told Reuters on Thursday that negotiations between GM and the two competing bidders (RHJ and Magna) for Opel could drag on longer than expected. The way it looks, the deal may never close—because GM doesn’t want to. There could be another rich sugar daddy: It’s you.
As far as Magna v.v. RHJ goes, “the process is just not far enough along from today’s point of view,” said Thomas Schaefer. In his day job, he is state secretary in the finance ministry of Hesse. On the Opel Task Force, he represents the interests of his state and three others that are home to Opel manufacturing plants.
Schaefer doesn’t understand what’s keeping GM from signing: “I believe there are only a limited number of issues still open. If one were to sit down and concentrate on working them out, a solution could be found in 24 hours,” Schaefer said.
GM doesn’t seem to look for solutions. They want to drag it out as long as possible. In the GM blog, Smith writes “We still believe this can be closed by the end of September.”
Dear John: You are delusional. The German national elections are on September 28. After that date, you won’t get a cent out of Berlin. Already, there is very little political leverage in Opel. German opinion has turned anti-bailout. Even the Social Democrats and their union buddies are amazingly subdued on the issue. Actually, the union buddies are distancing themselves from the Social Democrats: For the first time, the German metalworkers union will abstain from endorsing a party or candidate.
Dear John: Or maybe, you are not delusional after all. Maybe you never wanted to sell Opel. Maybe you wanted to buy time and collect the German €1.5b bridge loan. The Sueddeutsche Zeitung comes to the same conclusion voiced by TTAC a day earlier: “Quite possibly, GM doesn’t want to sell Opel. Hardliners at GM don’t want to set Opel free and want to keep them at all costs.” In a separate article, the Sueddeutsche writes that there is a scenario in which GM buys back Opel from the German trustees, using American taxpayer’s money. The Sueddeutsche picked up Vietnamesque rumors of “hawks” and “doves” at Government Motors. The hawks want to keep Opel. The doves want to sell Opel to an investor.
Dear John: In your blog, you deny that option, so vehemently that the grammar turns into collateral damage: “GM has not and will not approach the U.S. Treasury for funding to restructure Opel.” You also claim “GM does not seek to reacquire majority control of Opel, from any investor candidate.”
If that is true—honestly, we don’t think it is, unless these sentences are very carefully parsed—what’s keeping you from closing the deal in the 24 hours Herr Schaefer thinks it will take?
Here is the hawkish sentence parsing scenario: Your overlords in D.C. told you not to sell. You didn’t approach the Treasury for funding, Treasury approached you. They give you the money it takes to pay back Berlin’s bridge loan. Opel goes back to GM. That way, majority control doesn’t need to be reacquired from any investor candidate. Sound about right?
Did we say the Opel sale is getting messier and messier? GM seems to be in urgent need to attend remedial reading class.
There is the German government making noises that if GM doesn’t say “Ja” to Magna, the government can’t guarantee that another suitor gets loan guarantees. Which in German means, they won’t. GM can’t read the writing on the wall.
Then, GM wants a buyback clause. RHJ happily wants to give one. The German government says: No way. GM can’t read the writing on the wall.
Then someone leaks a supposedly confidential analysis that says that all bids are no good. The specter of bankruptcy is being raised. GM can’t read the writing on the wall. Magna immediately sweetens their bid. RHJ, GM’s darling, does nothing. GM can’t read the writing on the wall.
Now John Smith, GM group VP (and GM’s chief negotiator for the sale of Opel), goes on GM Europe’s website and writes with a supposedly straight face, “despite media reports to the contrary, GM has NOT specified its preference for a bidder.” They did not?
The German government sure thinks GM has a preference: RHJ. According to Der Spiegel, John Smith just received a letter from the German government in which he is reminded that the “loan guarantees come with conditions.” The letter was prompted by John Smith telling the German government that he prefers RHJ. GM can’t read the writing on the wall.
Just in case anybody missed the fact that GM can’t read the writing on the wall, John Smith clearly spells out a preference in the same post on the same website.
He word-smiths that the Magna bid “contained elements around intellectual property and our Russian operations that simply could not be implemented. GM has partners in other parts of the world who have joint ownership of these assets . . . we simply could not execute the deal as submitted.”
Supposedly, “discussions with Magna continue in earnest to resolve these challenges.” Yeah, sure.
What about RHJ, for which GM supposedly has no preference? Smith gets excited: “The bid from RHJI is completed and would represent a much simpler structure and would be easier to implement. It would require less monetary participation by the government and would keep our global alignments solid, while still creating an independent Opel/Vauxhall organization in Germany. This remains a reasonable and viable option to be considered as the very difficult issues around the Magna negotiations continue to be worked.”
Does this still sound like no preference?
GM either can’t read the writing on the wall. Or they just aren’t interested in selling Opel. They also are totally ignorant of German politics.
Germany is heading into an election in September. Economy Minister von und zu Guttenberg had opposed an Opel bailout since day one. Guttenberg still “cannot rule out an Opel bankruptcy,” writes the Manager Magazine. This position made the baron from Bavaria the darling of the people. Guttenberg just advanced to Germany’s most popular politician, before chancellor Angela Merkel. Even the Social Democrats, who are indicated to lose the elections by a landslide, don’t want to touch the hot potato Opel more than absolutely necessary.
GM quickly needs to find their glasses and read what it says in big letters on the wall: “No RHJ. No buyback option.” If they don’t, and especially if the matter is not settled until the elections, German politicians will remember what is recommended as the best prevention against swine flu: Wash your hands. Of the Opel mess.
If that happens, Berlin saves billions in loan guarantees. Opel goes bankrupt. Then, BAIC might get Opel after all. For real cheap.