General Motors and the Swine Flu
Apr 28, 2009
Posted by Jody Eisenman | Filed under Uncategorized
No, one has nothing to do with the other. However, these are two primary news stories shaping the markets today. As the Swine Flu spreads across Mexico and into this country, investors got skittish, sending the Dow about 50 points. Also, any drug or biotechnology stock that had anything to do with a treatment or potential treatment for the disease shot up in value. Although I have no idea how severe this might get, (lets hope it doesn’t), my hunch is that the panic will quickly subside, along with previous outbreaks like SARS, Legionnaires Disease and the Avian Flu. I think it’s a good sign that the CDC seems to have a handle on the situation.
Meanwhile, GM continues its’ negotiations with both the unions and the bondholders in order to structure an “orderly” bankruptcy. Basically, along with the layoffs and product restructuring (say goodbye to Pontiac), GM is looking to trade its’ heavy debt load for increased equity in the new entity. The company is close to reaching a deal with the unions. The bondholders, however, are another story. After sticking to a hardline offer of fifteen cents on the dollar, GM (read: the government) has now “upped” the offer to 225 shares of GM common for each $1000 owed. At current prices, this would appear to be worth about forty five cents on the dollar. However, this is really a mirage.
Here’s why: GM is proposing to issue an additional 60 billion shares to the unions, the government and the bondholders. At current prices, this would give GM a market capitalization of close to $130 billion. The bondholders’ stake ($27 billion face value) would be worth around $12.5 billion. The problem is twofold. First, the stock price. A $130 billion valuation for GM is incredibly rich. The current valuation is 1.25 billion! Ford is a little over $5 billion. Even a slimmed down GM can’t possibly be worth anywhere near this valuation in my humble opinion. Even if you gave the company a valuation of $40 billion (which is still ridiculously high), the bondholders’ stake would shrink to about $4 billion, or roughly fifteen cents on the dollar. This brings us to the second problem. Forgetting the fact that the bondholders feel that they shouldn’t be treated any worse than the unions (who are getting 40% vs the bondholders 10%), they also need to know that they would be getting more than they would in bankruptcy. Remember, in a bankruptcy, debt holders claims are senior to shareholders. Therefore, if bondholders feel that they will they will receive more by simply allowing the company to go under, why on Earth would they take less in a restructuring?. The answer is, they wouldn’t, which is why I feel this plan will probably not pass in its’ present form. In the meantime, the negotiations continue.
May 3rd, 2009 at 4:44 pm
[...] General Motors and the Swine Flu [...]