GM’s Recovery Effort Revs Up
Even after taking important steps this week in its turnaround plan, General Motors Corp. has much more to do before returning to profitability and market stability, analysts said Thursday.
The beleaguered automaker’s announcement Thursday that it had sold a larger majority interest in its commercial mortgage business in an $8.8-billion deal was seen as further evidence that its recovery plan was picking up steam.
The sale of 78% of GMAC Commercial Holding Corp. to an investor group led by Kohlberg Kravis Roberts & Co. -- up from a 60% stake agreed to in August -- will raise cash and bolster GM’s sagging credit ratings.
The sale also means the automaker can still go forward with efforts to sell at least 51% of its giant financing arm, General Motors Acceptance Corp., which ran the commercial-mortgage business and is GM’s only profitable subsidiary.
The deal came a day after GM’s announcement of a massive buyout plan to dramatically trim its workforce.
But many analysts suggested Thursday that the Detroit-based company must move even faster to further reduce staffing, slash generous employee benefits and upgrade a product line that continues to lose market share.
GM has not made a profit from its U.S. car business in years and last year lost $10.6 billion.
Until the company “stabilizes market share, rationalizes capacity
Even the historic buyout and retirement incentives plan offered Wednesday to 113,000 hourly GM workers in the U.S. failed to wow some analysts.
Jon Rogers, autos analyst at Citigroup, ho-hummed the plan in an investment note.
Because GM’s contract with the United Auto Workers union provides nearly full pay and benefits to laid-off workers, many would receive more money by staying and losing their jobs in a plant shutdown than by taking the $35,000 to $140,000 buyout payments, he said.
Before GM can start implementing that program, it faces the threat of a strike at Delphi Corp., its largest parts supplier and a former subsidiary that filed for bankruptcy protection in October.
Delphi has said that if it can’t agree with the union on pay cuts by March 30, it will ask the U.S. Bankruptcy Court to void its union contracts. That, union leaders said, would cause a strike.
The betting is that GM won’t let that happen. A strike that halts the steady stream of parts from Delphi and forces the automaker to shut down would cost the company about $5 billion a month and probably would force it into a bankruptcy filing of its own.
“The two things that matter most right now are averting a Delphi strike and selling a stake” in General Motors Acceptance Corp., said Shelly Lombard, auto industry analyst with GimmeCredit, a New York-based corporate bond research firm.
“That’s what will determine if GM lives or dies,” she said.
Selling a majority stake in GMAC, not just the small commercial mortgage deal announced Thursday, is crucial, Lombard said.
“If nobody buys, the markets will interpret that as a real negative,” she said.
A 51% stake in GMAC is believed to be worth $10 billion to $13 billion in cash -- money that GM can use to finance its downsizing. Thursday’s sale of the company’s commercial mortgage business was for $1.5 million in cash but also included the repayment of $7.3 billion in loans to GMAC, giving the automaker proceeds of nearly $9 billion. The company runs through cash at the rate of $25 million a day.
Not everyone believes GM is still faltering. The buyout plan announced Wednesday “sure is a good start,” said George Magliano, New York-based head of the U.S. auto industry practice at Global Insight, an economic consulting and forecasting firm.
“It will help them get costs under control, and I believe it also defuses the strike threat from Delphi,” he said.
GM’s biggest challenge ahead is to reduce an oversize workforce that drains much of the company’s resources, industry watchers say. GM also must cut back on the generous pension and healthcare plans it has negotiated with its unions.
All of that will come to a head next year when the auto workers’ present contracts with GM, Ford Motor Co. and Daimler Chrysler expire and the automakers negotiate with the union over new labor pacts.
Meantime, the company has acknowledged its shrinking status in the U.S. and said in November that it would close a dozen North American plants and trim its U.S. hourly payroll by 30,000 jobs by 2008. That would leave it with production capacity to maintain a 25% share of the U.S. passenger vehicle market -- down from 50% in the mid-1950s.
Some industry watchers, however, have said that GM needs to cut deeper. An 18% to 20% market share is more realistic, they say, given continued intense competition from Japanese and Korean automakers.
The company also needs to get its financial house in order. Its accounting practices are under investigation by the Securities and Exchange Commission. GM has said it will be restating financial reports back to 2000. The company also restated its 2005 financial report last week, adding almost $2 billion to the $8.55-billion loss it originally reported. That has prompted a call by GM’s board for an internal investigation.
But GM’s recent announcements show that things are happening, even if under duress.
“GM failed for years to accept that it was in crisis,” said Kenneth Elias of Maryann Keller & Associates, an automotive industry consulting firm. “But activity has picked up since Jerry York joined the board.”
Financier Jerome York is chief advisor to GM’s largest individual investor, Los Angeles billionaire Kirk Kerkorian. He joined GM’s board in February “and began acting as a crisis consultant to the company,” Elias said. “We believe he is forcing more action from management.”
