Friday, April 30, 2010

GM's Shell Game

Last week Detroit automaker General Motors announced the early repayment of government loans made by the U.S. and Canada. The U.S. was paid they said $4.7 billion and Canada another $1.1 billion. GM then launched an ad campaign featuring Ed Whitacre, GM’s chairman of the board, as he walked through a GM production plant among happy faced employees. Whitacre made it sound like GM is some sort of heroic public service group, providing jobs for the masses and turning out a product without which the consumer cannot survive.

Some investors might get a false sense of well being from the GM news. After all, if one of the major manufacturers in the U.S. is healthy that means jobs and prosperity. Right? That means a recovery in orders to small-cap automotive suppliers. Right? Well….maybe.

Since the GM announcement, Senator Grassley’s office has helped put things in better perspective. First, the amount repaid last week - $5.8 billion - is a minor portion of what GM received in the first place - $52 billion. Second, the majority of the government’s bailout loan was converted to equity. After payment last week, the Treasury Department’s stake in GM includes $2.1 billion in preferred stock and 60.8% of GM's common stock. Third, as a consequence of the repayment, the Treasury Department released $6.6 billion in funds that had been held in escrow for GM against yet another rainy day in what has been undoubtedly a long streak of mean weather. The latter factoid could have been read by anyone as it was in GM’s 8K filed with the SEC on April 22, 2010. GM netted $800 million last week, essentially repaying the remaining portion of the government loans with other taxpayer money.

There is no real signal of financial health at GM in the loan repayment news.

Furthermore, as the majority investor in GM, the U.S. taxpayer is still very much on the hook for GM’s fate. Taxpayers will only be made whole, if, first, GM achieves fundamental success; second, the equity value increases over the conversion price, and third, the Treasury Department is able to unload its stake at a profit.

Whitacre has been making noises about an initial public offering for General Motors, suggesting that taxpayers' stake in GM could be sold in a public deal. Who would be the most likely participants in such a deal? You are right, taxpayers!

There is no real signal of wealth creation in the GM shell game story…at least for now.



Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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