GM skids into the record books

It was once the world's largest company, but the bankruptcy of General Motors is the biggest industrial failure in history. Stephen Foley reports on a presidential plan to get the car maker back on its feet
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The Independent Online

"This is not just any company we're talking about, this is General Motors." Barack Obama appealed to history yesterday as he unveiled a US government takeover of the nation's largest car company and heralded an era of unprecedented federal involvement in the private sector. Hours after the 101-year-old maker of Cadillacs and Chevrolets filed a humiliating Chapter 11 bankruptcy petition at a Manhattan distrcit court, the President appeared before the cameras to justify the investment of $50bn of taxpayers' money to fund GM's revival.

The bankruptcy filing was a long overdue break with the past that would finally rid GM of its legacy of high costs, he said. "The GM of the future will be different than the GM of the past. I am absolutely confident that, if well managed, a new GM will emerge that can provide a new generation of Americans with the chance to live out their dreams, that can out-compete auto-makers from around the world. When that happens, we can truly say that what is good for General Motors, and all who work there, is good for the United States of America."

GM enters bankruptcy with debts of $172.8bn and assets valued at just $82.3bn, according to documents filed yesterday. The company has been kept afloat since December by a drip of loans from the US government, which now total $20bn. A further $30.1bn will be handed over during the bankruptcy process and GM will have to pay back less than $9bn. Mr Obama said it was important not to burden the restructured company with big debts that would hamper its progress. Instead, the US government will own a 60 per cent equity stake in "New GM". Federal and provincial governments in Canada, where many GM plants are located, are putting in $9.5bn and will get a 12 per cent equity stake. Governments will have the right to appoint board members to look after their interests, but Mr Obama was at pains yesterday to insist he would not meddle in the day-to-day running of the company.

Whether Congress will seek to exert influence, however, remains an open question. Even the administration has negotiated into the deal a promise that GM will build a greater proportion of its vehicles in the US when it starts work on a new small car that will help it meet Mr Obama's new federal fuel-efficiency standards. "When a difficult decision has to be made on matters like where to open a new plant or what type of new car to make, the new GM, not the US government, will make that decision," Mr Obama said. He described the government as a "reluctant shareholder" and promised to "get out quickly", but there are no talks yet about how that might be achieved.

GM has been preparing for bankruptcy since the end of March, when a White House task force reviewing the car industry rejected its previous restructuring proposal, saying it did not wring the necessary concessions from bondholders and unions and was based on an unrealistic assumption about the speed with which car sales might revive. Mr Obama fired Rick Wagoner, GM's chief executive of nine years, saying his recovery plan was unviable. Since then, there has been steady progress on a deal, eased by the promise of more government money, but also by the threat that bondholders and union members may fare worse in unplanned and unpredictable Chapter 11 bankruptcy proceedings.

Last Friday, the United Auto Workers union agreed to start working on new terms, under a revised contract that freezes wages, ends bonuses and certain work practices and includes a no-strike clause. Most importantly, the UAW will forego much of the cash investment it was expecting in a new union-run retiree healthcare trust, taking most of the money instead in the form of GM shares. The trust will own 17.5 per cent of New GM.

Even a majority of GM's unsecured bondholders voted in favour of a deal that will give them just a fraction of the face value of their investment, and that in the form of 10 per cent of New GM shares. The Chapter 11 filing aims to rubber stamp the sale of most of GM's assets to New GM, hopefully within 90 days. The rump of unwanted plants and other liabilities will be wound down over time.

Key to the speed and success of the bankruptcy filing will be the strength of legal opposition from the 46 per cent of bondholders who did not support the deal, and from the 2,600 GM dealers who are set to be axed under the restructuring plan. The number of dealerships is set to fall from 6,200, as the company scraps brands and finally adjusts to much lower demand for its vehicles. A generation ago, almost one in two cars on the road in America were GM cars, but the company's market share fell to 22 per cent last year. The final straw came as the credit crisis disrupted the availability of vehicle financing for potential buyers and the recession kept consumers from making big purchases, sending US car sales plunging 40 per cent in the past year. The New GM is expected to be profitable once industry-wide car sales recover to 10 million vehicles; they are currently running at an annual rate of 9.5 million.

Carl-Peter Forster, the president of GM Europe, which owns Vauxhall, Opel and Saab, said the preliminary agreement between GM, the German government, and a consortium led by the Canadian company Magna International had enabled the European operation to escape the bankruptcy filing. The German government is providing up to €1.5bn (£1.3bn) in bridge financing.

In Britain, about 5,000 workers at Vauxhall's plants in Ellesmere Port and Luton face an anxious wait despite the Magna deal. Lord Mandelson, the Business minister, insisted on Sunday that the Government had received assurances that production would continue in this country, but warned that it could be two months before Magna unveils the full detail of its plans.

Restructuring at "pure, unadulterated speed" is pivotal to the future of GM's US operations, its chief executive Fritz Henderson said at a press conference at the company's head office in Manhattan. "We will do it right and we will do it once."

Rod Lache, an auto industry analyst at Deutsche Bank, noted that the financial markets appear to believe the restructured GM really will be a viable, profitable company. GM's bonds, he pointed out, are trading at levels which value their holders' 10 per cent stake in New GM at between $2.1bn and $2.7bn. That would make the new General Motors more valuable than the one US car company that has been hoping to benefit from its historic rivals woes, the one company to have avoided falling on the government's mercies – Ford.

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