GM: The UAW looks to have won the best deal in General Motors' bankruptcy. Like the government and unsecured bondholders, union workers and retirees have agreed to take some of what they are owed in the form of equity in a restructured GM. A Breakingviews calculator shows you how they stand the best chance of recouping their cash.
Take one rosy scenario where GM brings in annual revenues of $150 billion – about what GM achieved in 2008, but 50 per cent more than the company is expected to deliver this year after selling sharply fewer cars and hiving off four of its eight brands. Then assume earnings before interest, tax, depreciation and amortization run at some 14 per cent of revenues – the kind of operating margin even Toyota only achieved in its best year ever.
That would put GM’s equity market value at some $84 billion, after applying a five times valuation multiple, stripping out debt and making some other assumptions. That’s big enough for US taxpayers’ 61.7 per cent stake - diluted from its initial 72.5 per cent by other shareholders exercising warrants - to be worth a hair more than the $50 billion of loans it is expected to swap into equity.
In this scenario, the employee benefits plan, which took a stake in the company in lieu of $10 billion in cash, would be sitting on shares worth more than $14billion. After deducting the cost of exercising warrants, the plan would still be in the money by some 25 per cent.
The unsecured bondholders, meanwhile, would still be losers with their equity stake worth only just over half the $27 billion of debt it is supposed to be replacing.
Now take a second, less robust scenario with GM making $125 billion of revenue and 10 per cent ebitda margins – still a level the company hasn’t seen in years. In this case, all the equity holders would be out of the money. But the employees’ stock would be worth about 61 cents on the dollar, and the government would be half way to recouping its investment. The unsecured bondholders, meanwhile, would still be less than 20 per cent of the way there.
Sure, GM’s unsecured debt has traded well below par for years. But it’s no surprise some of the company's creditors feel they have got the short end of the stick in GM’s restructuring – and in Chrysler’s analogous plan - despite being owed more than the company's employees.
