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[Enterprising Investor]

Weighing New GM's Resale Value

By SHARON TERLEP

DETROIT—General Motors Co. has made progress tidying up its balance sheet ahead of a planned initial public stock offering next month, but there's still a big question it has to answer for potential investors: Is GM fixed?

The auto maker said Thursday that it will return another $2.1 billion of the nearly $50 billion in bailout funds it got from U.S. taxpayers. The repayment was one of a series of moves GM, which is majority owned by the federal government, announced to reduce its liabilities and show financial strength ahead of the IPO.

GM said it will repay the money by buying back 83.9 million preferred shares owned by the U.S. Treasury. In a separate move, it said it will immediately pay $2.8 billion to reduce the amount it owes to a trust fund that covers the cost of health care for retired workers.

After the IPO, the auto maker plans to cut its liabilities further by contributing $4 billion in cash and $2 billion in stock to employee pension funds.

From Icon to Bankruptcy

All told, the moves will use $10.9 billion, but will save about $500 million a year in interest payments. GM will be left with $24 billion in liquidity, including a backup $5 billion revolving credit line, which company executives believe is enough to keep it moving forward, especially now that it is making money again.

The stock buyback from the Treasury is significant because the Obama administration is seeking to recoup the entire $49.5 billion that taxpayers poured into GM, starting in the final days of the George W. Bush administration. With Thursday's deal, GM will have returned about $9.5 billion of that money, through loan repayments, interest charges and dividends, the Treasury said.

During a stay in bankruptcy court last year, GM slashed its debt and costs, halved the number of brands it sells and swept out its entrenched leadership in favor of aggressive newcomers.

Bolstered by a new, lower-cost union contract, some strong-selling models and an improving economy, GM reported a $2.2 billion profit for this year's first half, a sharp turnaround after losing nearly $90 billion between 2005 and its bankruptcy filing in June 2009. GM's U.S. sales rose 6.8% in the first nine months of 2010.

But, as for whether GM is fixed, the answer is yes—but not completely. Many problems linger.

GM's U.S. market share slipped 2.8 percentage points this year through September as overall car sales recovered. One reason is the company still doesn't make enough models that appeal to a broad spectrum of Americans, particularly young, urban drivers and those on both coasts.

GM faces intense competition from a resurgent Ford Motor Co. and newer rivals such as Korea's Hyundai Motor Co., as well as Toyota Motor Corp., which remains a formidable competitor despite its safety recalls. In Europe, GM has racked up years of losses at its Adam Opel GmbH unit.

While bankruptcy did GM much good, it also left the company with a gap in its product pipeline because development of some models was frozen for months as the company slid toward Chapter 11.

GM also has an image problem. Its bailout came as anti-government sentiment was rising, and many consumers and lawmakers see GM as "Government Motors" because of the Treasury's 61% stake in the company.

Here's a look at what GM has fixed—and what remains to be done.
What's Fixed

Bankruptcy finally enabled GM to shrink its North American operations to fit a smaller and more competitive market. It abandoned 14 of its 47 North American plants, shut down its slow-selling Hummer, Pontiac and Saturn brands, and sold Saab, allowing it to put more resources into Chevrolet, Cadillac, Buick and GMC.

Perhaps the biggest achievement of GM's 41-day stay in bankruptcy court is its new balance sheet. After the measures outlined on Thursday, GM has just $8.2 billion in debt, down from $45.9 billion before it filed for court protection. GM also has $24 billion in cash, $4 billion more than at the end of 2009.

A big part of the debt reduction came from a deal with the United Auto Workers. GM was obligated to pay billions of dollars into a trust fund to cover health care for retired union workers. Instead of paying in cash, GM won union approval to put stock into the trust, which is now GM's second-largest shareholder, with a 17.5% stake.
GM Icons and Flops

The cost reductions are boosting the bottom line. In the second quarter, GM made $2,009 on every vehicle it produced in North America. In the three months before it went into Chapter 11, GM lost $4,081 on every car or truck it made in the region.

That the company can make money with U.S. car sales at around 10.5 million a year—compared with 16 million annually earlier this decade—means it should profit handsomely when sales recover further.

For years, GM hurt itself by running too many plants and making more cars than consumers cared to buy. But after closing so many plants, GM has gotten supply in line with demand, and its plants are more productive. In the second quarter, GM's North American factories operated at 93% of capacity, up from 40% a year earlier.

Now some new models are selling at higher prices. The recently redesigned Buick LaCrosse sedan typically sells for $30,000 to $40,000, according to dealers—about $7,000 more than the old version.

In China, GM's joint ventures are booming and it is now the top-selling foreign brand, having overtaken Volkswagen AG. This year, for the first time, GM is selling more vehicles in China than in the U.S.

GM's progress has come under a new board and management team. In the past, GM tended to deliberate endlessly over even minor decisions, delaying tough action.

During GM's bankruptcy, the Treasury stocked the GM board with industry outsiders. Edward E. Whitacre Jr., a no-nonsense Texan who spent most of his career building SBC Communications Inc. into a telecommunications giant, was named chairman. Another telecom deal maker, Daniel F. Akerson, also joined the board.

In December 2009, Mr. Whitacre wanted faster change and took the chief executive post himself, ousting GM veteran Frederick "Fritz" Henderson. The chairman shook up other management as well.
What Needs Work

Though GM is making money and has a clean balance sheet, one of its trouble spots is pensions for its retired workers. The company has more than $27 billion in outstanding pension obligations. Of that, payments totaling $10 billion are due in 2014 and 2015. Making such payments could hamper GM's ability to develop new models and modernize operations.

In Europe, GM's is closing an Opel plant in Belgium as part of a turnaround plan, but also needs to raise market share—a difficult feat in the competitive European market. In private, GM's advisers and some board members acknowledge getting Opel to break even may be the best the company can do.

Questions still hover over GM's executive suite. Mr. Akerson, now CEO, has been at the helm fewer than 60 days, and has little experience running a large manufacturing company.

Speaking to reporters in September, he conceded that the company has a long way to go. "The GM we know today will not be the GM we see five to 10 years from now," he said.

While GM's U.S. sales rose 6.8% in the first nine months of the year, its increase has been fueled by higher sales to rental-car companies and other "fleet" customers. Sales to individual buyers—which generally are more profitable and a truer measure of a car maker's ability to win customers—were down about 2%, according to people familiar with the matter.

In an effort to spark enthusiasm for the Chevrolet brand–which now accounts for more than two-thirds of its sales–GM this week announced plans to blanket the airwaves with a new, Americana-themed ad campaign.

Changing consumer perceptions is easier if an auto maker launches new, head-turning models. GM has that in the form of the Chevrolet Volt, the battery-powered car due in December, and some new small cars, including compacts for Buick and Cadillac.

Beyond that, GM has some holes in its lineup. Bankruptcy forced it o freeze development of several vehicle lines, including a new generation of full-size pickups and sport-utility vehicles. That means GM won't be able to wow potential investors by pointing to a string of high-profit models waiting in the wings. GM won't have new trucks to offer until at least 2013, though it could update current models.

Privately, GM executives acknowledge weakness in the company's product line that could hurt its competitiveness over the next few years.

GM has committed almost $1 billion to revamp its big trucks and SUVs and tripled the size of its truck-design studio to be able to develop SUVs alongside pickups, rather than separately. "We are moving as fast as we can," said GM's design chief, Ed Welburn, in an interview. "But you can only speed things up so much."

Write to Sharon Terlep at [e-mail]

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