By Tony D’Altorio
It wasn’t that long ago that General Motors underwent a US government-bankrolled bankruptcy that all but wiped out its existing shareholders. Now, thirteen months later, General Motors is filing for an initial public offering (IPO).
The US and Canadian governments own over 70% of the company. And North American taxpayers have invested about $60 billion in it since December 2008. Obviously, the larger continent has very good reason to wish GM the best going forward. And Wall Street has already begun pushing the IPO hard.
In its favor, General Motors has made a profit in the last two quarters. It has replaced the troublesome Ed Whitacre with new CEO Daniel Akerson. And it has ongoing talks with major banks for a revolving line of credit. In addition, GM is selling more cars domestically with four brands today – Buick, Cadillac, Chevrolet and GMC – than it did with eight brands before its bankruptcy.
Its 19% US market share in July held steady from the previous year. And as for emerging markets, China made up almost a third of its first-quarter vehicle deliveries: 11% more than its sales in North America.
But it isn’t all smiles and sunshine. After all, the new CEO has no automotive industry experience. General Motors keeps losing money in Europe. And quarter-on-quarter, it lost market share in the three hottest global vehicle markets: China, Brazil and India.
Even in the US, GM’s retail sales remain about flat. Fleet sales have flattered overall sales, so it may have less customer acceptance than headline figures suggest.
General Motors’ Pension Plan Obligations
Wall Street has excitedly priced General Motors at $60 billion or more. But that rosy figure doesn’t take its giant pension fund into consideration. GM has the world’s largest private sector version, with about $100 billion in liabilities. And in order to keep the United Auto Workers union happy, that pension plan was transferred as-is to the "new" company.
GM has made no recent contributions to the fund. But it may add $4.3 billion in 2014, $5.7 billion in 2015, and “possibly” more after that. Investors should interpret “possibly” as “definitely.”
So yes, GM’s second-quarter earnings were its highest since 2004. But first-half operating income came in at only $2.9 billion. Even if it pulls the same for the last six months, it would barely cover its prospective pension plan payments. And that leaves nothing to actually run the company.
The Real General Motors Deal
General Motors’ stated pension deficit is “only” $27 billion. But that assumes the fund’s assets return an annual 8.5%. A closer look shows annual payments of $9.3 billion. On fund assets of $85 billion, that means GM actually needs a 10.9% yearly return.
Investing the pension fund safely into US Treasuries would yield only $2.2 billion, leaving an annual shortfall of over $7 billion. And the planned $4.3 and $5.7 billion contributions won’t plug the gap either… At best, it will only kick the can down the road a ways.
It really just comes down to a numbers game. At last count, GM had 531,500 pensioners and only 87,500 active workers in the US or about six to one… if you leave out the 83,500 people who have left the company but haven’t retired yet.
Really, it’s rather like a badly run hedge fund with leverage working against GM. The company will function more to support the pension plan than to sell cars. Additionally, pension consultant John Ralfe calculates that only 35% of the fund’s assets are in investment-grade bonds. The rest is spread across stocks, real estate, hedge funds, private equity funds and the like.
So basically, GM has the same strategy as someone who takes out an unaffordable mortgage, then makes insufficient annual payments believing that “something” will turn up before the repayment date. And we all know how that works out.
Investors who want a future look at GM only need to glance at Illinois, which is being bled dry by its 40% funded pension fund.
Bottom line: Don’t invest in General Motors. The same pension plan liabilities that sank it before will sink it again.
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