GM Announces Another Restructuring and Stock at Another 50+ Year Low

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July 15, 2008

General Motors announced this morning its latest restructuring efforts to conserve cash as the effects of rising fuel cost and slowdown in the US appear to be crippling the automaker. As I wrote in The GM Death Spiral, an announcement after the traditional summer shut down was expected. The significance of today’s restructuring will not be known until the company releases its 2nd Quarter financials in coming weeks. However, the big news released today is the company has suspended its dividend as part of its efforts conserve cash. This has contributed to GM’s stock dropping below $9/share in intraday trading, resulting in market value on the cusp of $5 billion.

GM’s restructuring assumes the US sales rate will be at approximately 14 million vehicles per year for 2008 - 2009, and the company will have a 21% market share. The company continues to believe it has sufficient liquidity to meet it 2008 funding requirements.

The company plans to reduce head count, cut executive discretionary, and reduce cash compensation for top executive by 75% to 84%. The plan also eliminates retired salary health care coverage, effective January 1, 2009. The company also announced capital spending will be reduced to 2006-2007 levels. GM will reduce spending by approximately $1.5 billion versus prior plans. Capital expenditures are now estimated to total $7 billion in 2009 versus prior plans of $8.5 billion. To put this into perspective Toyota spent $14 billion in 2006 and Hyundai planned to spend almost $12 billion in 2008 on capital programs.

Among other adjustments for reducing production and plant closures that can be expedited, the company plans to save $10 billion including the deferment of approximately $1.7 billion of payments that had been scheduled to be made over the balance of 2008 and 2009 for the establishment of the new UAW healthcare VEBA.

To raise additional liquidity of $4-7 billion the company plans asset sales and financing activities. The company stated:

  • GM is undertaking a broad global assessment of its assets for possible sale or monetization, which is expected to generate approximately $2-4 billion of additional liquidity. The company believes there is significant liquidity potential from asset sales, without impacting the strategic direction of the company. Outside advisors are currently engaged in evaluating alternatives. A strategic analysis of the Hummer brand is underway, and GM is continuing to focus on profit improvement initiatives across all remaining GM brands.
  • GM will continue to opportunistically access global markets to raise additional liquidity. The company is initially targeting at least $2-3 billion of financing. The company has gross unencumbered assets of over $20 billion, which could support a significant secured debt offering, or multiple offerings, that would far exceed the initial target. Examples of such assets include stock of foreign subsidiaries, brands, stake in GMAC, and real estate.

The company also expects “significant” 2nd Quarter losses, driven in part by the negative impact of the recent American Axle and local union strikes in North America, as well as the continued weakness in the U.S. auto market and adverse vehicle segment mix.

In addition, the company expects to record significant charges to its previously announced hourly attrition program in the U.S., the recently announced North American truck capacity actions, valuation of GMAC stock, lease assets, Delphi recoveries, the American Axle settlement, the Canadian labor contract, and others.

The announced actions by the company signify a company in very serious trouble and were expected. Even the suspension of the cash dividend was anticipated given the value of the stock. However I see more band-aids on the situation that may give the company time if fully realized but little was presented that outlined systemic changes to the company that may be needed in North America.

I still question how the company will address its Buick-Pontiac-GMC division in the US as sales (Table 1) continue to founder. The GMC truck brand was to be the cornerstone division as Buick and Pontiac strove for relevance in the market. With high fuel prices truck and SUV sales will not prop up that division if sales continue to drop as they have in recent months. Pontiac and Buick also continue to fleet out many vehicles inflating the number presented below.

1999 2007 2008 est.
Buick 445,611 185,791 142,326
Pontiac 616,413 358,022 305,508
GMC 521,294 484,935 375,276
Total 1,583,318 1,028,748 823,110

Table 1: Buick-Pontiac-GMC Sales (Source Automotive News)

I still question how the company will address its Buick-Pontiac-GMC division in the US as sales continue to founder. The GMC truck brand was to be the cornerstone as Buick and Pontiac for relevance in the market. With high fuel prices truck and SUV sales will not prop up that division if sales continue to drop as they have in recent months. Also customers have not been migrating to Pontiac and Buick cars as the market transitions from trucks and SUVs. Oldsmobile was selling around 300,000 vehicles when it was announced the brand would be phased out.

The GMAC cash drain from the housing market crash as well the viability to raise additional funds for both GMAC and the parent company continue to be an ongoing concern.

The credit markets appear to be tightening again. Even Hollywood film studio Paramount Pictures recently suspended a $450 million financing deal with Deutsche Bank because of questionable terms. GM’s goal of raising $4-7 billion could be tough and not be under the most favorable of terms. The company even stated using overseas operations as collateral is an option which opens options but likely not good ones. Today Federal Reserve Chairman, Ben Bernacki also did not have encouraging words on the near term state of the US economy.

With that, GM presented a plan that called for more downsizing and getting smaller in the US. I just do not know how much smaller GM can get or if the company's assumptions were "conservative" enough.  It was only recently GM believed the US economy would rebound in the second half of the year. As GM has stated, it does not appear to be in dire need of capital but I believe the current economic conditions in the US have not hit bottom. In any case I will wait and see how bad the situation is when the 2nd Quarter financials are released


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