Getting Our Money Back: Did the GM Bailout Work?

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 |  Includes: GM, MTLQQ
by: Bennington Investment Ideas

GM (NYSE:GM) is currently preparing to IPO in November and has filed an amended S-1 with the Securities and Exchange Commission this past October 29th. While mainstream news has been following the story and reporting the details of the bailout and certain subsequent payments, the amended S-1 lays out almost all the facts and provides perhaps some additional insights.

There are several views as to whether or not this bailout worked ranging from the ideological purity point of view that bailouts are bad in general and hence should never be used to those who believe it saved the United States auto industry. Unfortunately, it is not possible to replay history and see what the alternatives might have yielded. However, I think the facts suggest that the taxpayers probably could have taken a less risky approach to their investment.

Bailout Package

Reviewing Amendment 4 to GM’s S-1 and other press releases, the bailout package consisted of an infusion of $49.5 billion in capital excluding a $361 million dollar loan related to a warranty program that was repaid in July 2009. The $49.5 billion investment consisted of $2.1 billion of 9% Series A Preferred stock, $6.7 billion of debt, and effectively $40.7 billion for a 60.8% stake in the common equity of the company.

The bailout package came from a United States government entity, UST. UST also received significant control of the company. GM also eventually applied for $10.3 billion in Section 136 loans (related to development of advanced technology vehicles) but was rejected by the DOE.

Transaction Structure

In the summer of 2009, Old GM filed Chapter 11 bankruptcy and then proceeded with a Section 363 sale creating the new GM, NGMCO, (hereafter “GM”) and Motors Liquidation Company (OTC:MTLQQ) (MLC) from Old GM. MLC contains the less desirable “assets” of Old GM, including out of date parts, facilities, substantially of the asbestos related claims, as well as most of Old GM’s liabilities. From the Amended S-1:

In connection with the 363 Sale, MLC retained Old GM’s unsecured US dollar denominated bonds, foreign currency denominated bonds, contingent convertible debt and certain other debt obligations of $25.5 billion.

MLC also retained $2.4 of non-current liabilities. Certain debts, including a $4.5 billion secured loan facility, a $1.5 US term loan and a $125 million secured credit facility were paid at the end of June 2009 in conjunction with the Chapter 11 reorganization. The more valuable assets and certain liabilities were moved into GM.

The other shareholders in the post-bankruptcy GM were the Voluntary Employee Benefit Association (VEBA) with 17.5%, various Canadian government entities with 11.7%, and Old GM unsecured creditors with 10% held through MLC. The total share count post bankruptcy was 500 million shares. MLC also received additional warrants to bring its total stake up to 15% of GM on a fully diluted basis.

GM emerged from bankruptcy on July 10, 2009 after 40 days.

Reorganization

GM embarked upon a reorganization that involved brand rationalization, headcount reduction, dealer closures, and other initiatives. These activities were focused on creating a leaner more competitive company. The bankruptcy also eliminated a significant amount of liabilities that created a financial drag on the company.

For the first half of 2010, GM recorded $64.6 billion in revenue with $2.2 billion in net income. GM now consists of three divisions: GMNA (General Motors North America), GMIO (General Motors International Operations), and GME (General Motors Europe). GM’s pension programs were underfunded by $27.4 billion at the end of 2009.

Bailout Repayment

GM then proceeded to repay the UST loan amount of $6.7 billion with $1 billion in December of 2009 and another $1 billion in March 2010. The remaining amount of $4.7 billion was repaid in April 2010.

In conjunction with the proposed November IPO, the 9% Preferred Series A Stock held by UST would be redeemed at 102% of its face value. This represents a substantial premium to its carry value related to expectations of loss of control.

Only the US government Series A will be redeemed. This will provide $2.14 billion against the initial $2.1 billion investment and a carrying value of $1.5 billion. Additionally, these investments have paid approximately $700 million in interest and dividends. The other Series A stock owners will be modified. Additional proceeds will go towards the pension program.

This means the current remaining amount of UST invested capital in GM is $39.96 billion. Depending on final determination of shares to be issued and price, UST is expected to reduce its ownership stake due to dilution.

Hypothetically, if GM raises $3 billion through the Preferred Series B Stock and $10 billion through common equity by issuing 365 million shares at $27.40 per share. Also assuming that there is a 3-for-1 pre-IPO stock split. This would mean there would be 1,865 million shares of equity, with UST owning 912 million or 48.9%. At $27.40 per share, this would value the UST stake at just under $25 billion, which is substantially below the remaining invested capital amount.

An alternative case using more favorable assumptions with a 4-for-1 pre-IPO stock split and $10.5 billion raised by issuing 300 million shares at $35 per share would give UST 1,216 million of 2,300 million shares or 52.9% with its stake valued at $42.6 billion which is above the remaining invested capital. Under this scenario, GM would have an approximate total enterprise value of $107 billion this does not reflect an approximate $20 billion of accrued expenses. Given Ford's (NYSE:F) TEV of about $144 billion with higher profits ($4.7 billion in net income for the first 6 months of 2010) this second scenario seems less likely.

Motors Liquidation Company currently has a market capitalization of $163 million and trades under (OTC:MTLQQ).

Conclusion

The conclusion is clearly not finalized and will not be until after the IPO is completed. The first scenario considered suggests a potential loss to taxpayers of about $15 billion and assumes that no future assistance would be required and excludes the US government cost of capital over the last about 2 years which at a 3% estimate would be another $3 billion in interest payments to finance the bailout.

This loss does not reflect the impact from keeping additional GM employees working nor the incremental tax revenue from their salaries which could be $1-1.5 billion. (20% effective tax rate x 1.5 years x 64,000 x 50k-75k) In the more favorable scenario, which makes some assumptions above the range seen in news articles commenting on the IPO, the US government would fully recover its investment.

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Disclosure: No positions