By Peter Whoriskey
Washington Post Staff Writer
Tuesday, June 30, 2009
If a new General Motors emerges from bankruptcy as planned, U.S. financial aid for the company will expand to nearly $50 billion, but neither the government nor the company is forecasting how much of the public money will be repaid.
It's sure to be a stretch. For the United States to fully recover its investment, the value of General Motors stock will have to reach levels it has never before attained.
"I'm not going to predict it -- that's not my job today," GM chief executive Fritz Henderson said in a recent interview.
"I don't know how much we're going to recover," a senior Obama administration official said as the company headed into bankruptcy last month.
This uncertainty stems from the difficulty in valuing the 60 percent GM stake that the United States will receive in exchange for the public investment. The government also gets preferred shares and other compensation.
The stake will be worth enough to fully cover the government's direct investment only if GM's stock rises above $68 billion. Even at its recent 2000 peak, GM's stock was worth only $56 billion.
"I don't see GM hitting those benchmarks in a very long time," said Maryann Keller, a veteran automotive analyst and author of "Rude Awakening: The Rise, Fall, and Struggle for Recovery of General Motors," which was published in 1989.
She noted that global competition will continue to squeeze American automakers. Though the world's factories can produce about 100 million vehicles a year, demand for them only stands at about 55 million, and the gap will push prices and profits down, she said.
"It's very unlikely" that the government will recover its money, said David Whiston, auto equities analyst at Morningstar. "GM will be a smaller company after the bankruptcy and there are going to be more foreign automakers entering the market that will make GM's efforts more difficult."
Both administration and GM officials assert that after the company springs from bankruptcy -- newly streamlined and freed of most of its debts -- the automaker will reverse its financial fall. Its recovery will pay further, hard-to-measure dividends by supporting the U.S. economy, they add.
The company's own internal analysis, prepared by Evercore Partners and presented to the company's board on May 31, shows how the government could recover its investment. According to that presentation, the equity value of the company in 2012 will range from $59 billion to $77 billion. If the stock value rises to the high end of that range, the U.S. could recover all of its investment.
"We have certainly looked at scenarios where, over time, a very substantial portion and potentially all of the taxpayer investment in General Motors will be returned," Ron Bloom, a senior adviser to the administration's auto task force, told a Senate committee earlier this month. "But I certainly by no means would say that I am highly confident that that will occur."
Bloom and GM chief executive Henderson have suggested that by shedding so much of its debt through bankruptcy, the company's value would be less encumbered and its stock prices freer to rise.
Henderson said it would be easy to envision GM's stock rising to levels high enough to cover the government's investment if the company's revenues approximate what they were before the economy faltered.
"Can a company with $100 [billion] to $140 billion of revenue have $70 billion of market cap?" Henderson said in an interview last week at the company's headquarters. "Yeah."
He said, "It's a function of how we execute, and do we get the margins out of the business that we need?"
As the auto rescue has unfolded, the question of whether the government will be repaid has taken on increasingly political overtones, as partisans debate whether the Bush administration or the Obama administration has handled the industry better.
The Bush administration began the GM bailout in December, offering the company emergency loans that grew over the coming months to nearly $20 billion. The loan terms called for the company to be restructured.
The Obama administration called the company's restructuring efforts inadequate and steered GM toward bankruptcy, from which the company is expected to emerge in July.
The government is planning to give the automaker an additional $30 billion as part of the plan to revive the company through bankruptcy.
In exchange, the government gets the 60 percent equity stake, and GM will also owe about $6.7 billion in secured debt and about $2.1 billion in preferred shares.
Assuming the government is repaid the debt and preferred shares, the value of the company's common shares would then have to rise to roughly $68 billion to pay back the remaining $41 billion in direct GM investment.
These calculations do not include the billions of dollars that the United States has put into GMAC, GM's financing arm, and into aiding auto suppliers. On the other hand, it does not capture the likely returns of those investments, nor do the calculations include the stock dilution caused by options, which could raise the break-even point.
In announcing the government's intention to put another $30 billion into the company earlier this month, President Obama said, "We're making these investments not because I want to spend the American people's tax dollars, but because I want to protect them."
How long it will take to recover them may not be clear for years.