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General Motors Files Bankruptcy

6/2/2009
By David Silver, Research Analyst

The countdown for General Motors (GM) to enter bankruptcy is finally over, and the results were extremely anticlimactic (yawn!). We knew this result was coming for a while.  All the new contracts signed over the past few weeks (with the UAW and bondholders) will help to speed up the bankruptcy filing, but if you think this will be a swift and painless time period, you have another thing coming. The Company has already slated 16 plants for closure and is going to announce another 14 this week.

The Government is on the hook for the money needed to navigate this record setting bankruptcy filing.  It is the largest manufacturing bankruptcy and the fourth largest in U.S. history, with $172.81 billion in debt and $82.29 billion in assets. The government indicated it would give GM another $30 billion (on top of the $19.4 billion it has already given), but we have our doubts that this cash infusion will be enough.

The ownership breakdown of the new GM is as follows:

  • Federal government will take a 60% stake
  • Canadian government will take a 12.5% stake
  • United Auto Workers union will receive a 17.5% stake
  • Current bondholders will receive a 10% stake
  • Existing shareholders are expected to be wiped out

Ahead of bankruptcy, we heard that GM was thinking about selling or closing its Pontiac, Saturn, Hummer, and Saab operations.  Management announced it was finalizing a deal to sell Hummer, and plans for the future of Saturn will be announced in the coming weeks.  Pontiac is still expected to be shutdown.  The four remaining brands will be limited to Chevrolet, Cadillac, GMC, and Buick.  The stock will cease trading on June 2. Additionally, it has been removed from the Dow Jones Industrial Average.  Now there are rumors that the Company has sold its Hummer brand, however, the other party and price have not been released.  We think it is a Chinese private equity firm.  Apparently, the sale will save 3,000 manufacturing jobs in America... The Saturn brand is also on the block, and management indicated it would have an update in the next few weeks.

In other automaker news, a bankruptcy judge approved the sale of the "Good Chrysler" to Fiat this morning as it seems that the administration was again able to use its weight to push a decision in its favor, as Judge Gonzalez said, "Any material delay would result in substantial costs in several areas, including the amounts required to restart the operations, loss of skilled workers, loss of suppliers and dealers who could be forced to go out of business in the interim, and the erosion of consumer confidence." Good Chrysler may emerge from bankruptcy under the administration's 30-60 day estimate, but the "Bad Chrysler" will continue to mire in bankruptcy for months to come.  Additionally, the collateral damage and ramifications will not be felt by the 60 day estimate, but instead will take much longer to really be grasped.

David Silver
Wall Street Strategies

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