Dividend stocks for income investors
See Jim's new portfolio to help navigate the treacherous interest-rate environment.
Jubak's Journal
Recent articles:
• 3 new global hot spots for investors, 4/7/2006
• 5 stocks for the next spending wave, 4/5/2006
• 5 reader picks for tech's next big thing, 4/4/2006
More...
| | Jubak's Journal
Bad for GM, bad for America
General Motors has launched a time bomb that could push the company into Chapter 11 -- and take down the financial markets with it.
By Jim Jubak
Leave it to the guys who are driving General Motors (GM, news, msgs) off a cliff to make things worse. Thanks to their most recent "solution" -- selling off a 51% stake in the company's profitable General Motors Acceptance Corp. financial arm -- CEO Rick Wagoner and his team have actually raised the odds that General Motors will have to seek bankruptcy protection. And made sure, as an added bonus, that they can do nothing to stop what theyve set in motion.
Pretty neat, huh?
But, wait, that isn't all that these guys managed to accomplish last week. Before you relax into some comfortable jeering from the sidelines -- unless you own GM stock or, even worse, work there or at some GM-dependent company -- you should know that last week's GMAC sale has put all of us in range if GM should blow up. Thanks to the way that Wagoner et al, structured the GMAC deal, they've created the possibility of a real blowup in the derivatives market that insures bond holders against default. If that bomb were to go off, every financial market would be in shrapnel range.
Cheap goods
So how does a CEO manage to put his company and the entire financial market at risk with a single deal?
By making it contingent on the whims of the not-so-rational combatants at Delphi (DPHIQ, news, msgs) and the United Auto Workers, who have locked horns over wages and benefits in Delphi's bankruptcy proceedings.
General Motors did this by "selling" 51% of GMAC to a private investment group including Citigroup (C, news, msgs) and headed by hedge fund Cerberus Capital Management for $14 billion. Of course, GM won't get that $14 billion all at once. When the deal closes, Cerberus and its partners will pay General Motors $7.4 billion. GM will collect another $2.7 billion in cash from GMAC as a return of the higher taxes that GM paid on GMAC's income when it owned the financial company. GM will receive another $4 billion over three years from GMAC as income on $20 billion in leases and retail assets that GM will retain after the deal.
Related news and commentary on MSN Money
This isn't exactly a great deal for General Motors. GMAC is the company's most profitable unit, earning $2.8 billion in 2005, and GM has been able to tap GMAC for capital during what has become a perennial rough patch. The investor group is paying about five times net income for its 51% stake in GMAC -- and part of that price is cash from GMAC itself. If you look just at actual cash from the investor group and subtract the cash from GMAC, the price is closer to two times income.
But when you've lost $10.6 billion in a year, as General Motors did in 2005, getting a good price takes back seat to getting the deal done at all. Especially when your auto sales are dropping like a rock. GM's U.S. sales dropped 14% in March.
The no-sale sale
But price isn't the real, company-crushing bad news in this sale. I'd save that moniker for this oddity: The sale isn't a sale at all. Cerberus and the rest of the group can walk away from this deal before it closes some time in the fourth quarter of 2006 if the credit rating on General Motor's unsecured long-term sinks to less than a triple-C rating from Standard & Poor's. A rating like that would be two notches deeper into junk-bond territory than General Motors' current rating of single-B. (The deal is also off if GMAC's own credit rating slips below its current double-B rating, just two notches below investment grade.)
What could drive General Motors bond ratings down another two notches just about overnight? A strike set off by supplier Delphis efforts to break its contracts with its unions in bankruptcy court. The company has filed a reorganization plan that includes closing or selling all but eight to 12 of its 33 North American plants and cutting as many as 30,000 jobs. For U.S. workers who keep their jobs, Delphi has proposed an immediate wage cut of $5 an hour (or 18%) to $22 an hour for production workers and another cut to $16.50 an hour -- for a package of cuts totaling $10.50 an hour -- in 2007.
The United Auto Workers, as you might imagine, has branded the proposal unacceptable and threatened a strike. Delphi has responded by asking the bankruptcy judge for a ruling that would allow the company to unilaterally break its union contracts with the company's 34,000 union workers and its 12,000 union retirees. The first hearing in this game of chicken is scheduled in U.S. Bankruptcy Court in New York on May 9-10. A ruling on the labor contract is unlikely until June.
| |
|
|
|
|
MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.
|
