U.S. Hopes To Recoup GM Outlay In 5 Years
Calculation Relies on Fast Revival for Firm Verging on Bankruptcy

By Peter Whoriskey
Washington Post Staff Writer
Saturday, May 30, 2009

The United States would recover most of its planned $50 billion investment in General Motors within five years, according to a preliminary Treasury Department estimate that foresees the company, now on the brink of bankruptcy, rebounding over that time to become a strapping global competitor.

By putting billions of dollars into the ailing automaker, the Obama administration has placed a huge bet on the effort to revive and streamline the company through the elimination of brands, dealerships and factories. Yesterday, the company's union announced that it had approved a cost-cutting contract and GM neared an agreement to shed its Opel brand.

If the government-monitored corporate reorganization fails and GM sputters again, however, the government investment into the company would be lost.

Some industry analysts are skeptical that an automaker that has struggled for so long could be so quickly reborn. The preliminary estimate, by contrast, reflects optimism that the iconic American manufacturer can flourish after its restructuring.

"I don't know how much we're going to recover," acknowledged an administration official who spoke on condition of anonymity. "I'm not here to tout stock. But we're very excited about this as a company."

After a planned GM bankruptcy, during which the company will seek to shed burdensome debts, the U.S. and Canadian governments will own 72.5 percent of the reorganized automaker. In addition, GM will owe the United States about $8 billion.

The United States could recover most of that investment by 2013, when, sources said, a Treasury projection shows the company would reach an equity value of $75 billion.

The government share, by then slightly diluted, would be worth about $46 billion. The $8 billion debt would have been repaid, and the government would have reaped billions in preferred-stock payments. Sources said the estimates are constantly being refined.

Brian Bethune, chief U.S. financial economist for IHS Global Insight, called the assumptions "extremely optimistic" given the risks in the economy and the challenges facing the company.

"Whenever a company goes through that deep of a restructuring, there are all kinds of risks," Bethune said. "This is not a nip-and-tuck exercise. This is major surgery."

Among the key variables in any such forecast is the number of new cars sold annually in the United States as well as the estimate of GM's share of the market.

During the boom years, the annualized figure for car sales in the United States hovered around 16 million. Recently, it has fallen to between 9 million and 10 million on an annualized basis.

In regulatory filings, GM has estimated that the car market will rebound to 16 million by 2012.

Those filings also assume the GM market share will slump slightly between now and 2012, to 18.4 percent from 19.5 percent, presumably because the company will offer fewer brands.

"It's not a completely unreasonable estimate -- if the market recovers and if they really invest in GM's capabilities," said Susan Helper, an economics professor at Case Western Reserve University who specializes in the auto industry. So far, the United States has invested $20 billion to keep GM in business and would contribute about $30 billion as part of a bankruptcy restructuring.

"We hope to recover as many taxpayer dollars as we can," the administration official said. "It would be wonderful to recover more."

For now, GM and the Obama administration are working toward streamlining the manufacturer's bloated operations.

Toward that end, the United Auto Workers ratified contract changes yesterday that will help General Motors cut more than $1 billion in labor costs.

Union President Ron Gettelfinger said 74 percent of GM's production and skilled-trade workers voted in favor of the deal yesterday.

Under the deal, the union's cost-of-living increases, performance bonuses and some holiday pay will be suspended to offset health-care costs.

The union, whose contract covers 54,000 workers, has agreed not to strike until 2015.

With this contract, "there's no excuse for these companies not to build in this country," Gettelfinger said.

He noted that GM announced yesterday that the company would retool an existing U.S. plant to build small cars, which typically have been built overseas because of their low prices.

"It's going to stop the imports coming in here from China," he said. "We can build those small cars in this country."

Meanwhile, GM's bondholders were weighing a company offer to give up claims to $27 billion in bonds for a 10 percent ownership stake in the company. Their decision is due by 5 p.m. today.

GM was also close to finalizing a deal that would allow it to sell its Opel unit. It would give control of the company's German-based subsidiary to Magna International, a Canadian auto-parts maker, which edged out Fiat in a bidding battle.

Opel accounts for a huge chunk of GM's output, with just under 1.5 million cars sold in 2008.

Negotiators met in Germany, where 25,000 of Opel's workers are employed. Chancellor Angela Merkel, facing elections this year, hosted all-night talks at her offices that ended at 5:30 a.m. Thursday. A U.S. Treasury official, German Cabinet members and financial advisers took part.

Under the agreement, Magna would inject $300 million into Opel on Tuesday to keep the firm afloat, a source involved in the talks said. GM would retain 35 percent of the company, unions would get 10 percent and Magna would get a controlling stake, the source added.

The German government would provide about $2 billion in short-term financing, according to a Bloomberg News report.

One key term responds to U.S. concerns that Opel could compete against its erstwhile parent corporation in the United States. The deal would prohibit Opel from selling cars or opening plants in the United States, the source said. Staff writers David Cho, Kendra Marr and Steven Mufson contributed to this report.

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