Market Playground

By Dennis “Cos” Costa

General Motors reported its second quarter financial and operating results on Thursday, August 12th, 2010, and the news was very good for the company and in turn — taxpayers. GM reported its second straight quarter of profits, with net income of $1.33B for the period, representing a 53% sequential increase of $465M, compared to the first quarter’s net income of $865M. Second quarter profits came as vehicle sales for GM were up 116K units, or 23% on a year-over-year basis, coming in at ~601K vehicles sold versus last years ~485K units.

GM is participating in a wider industry recovery in vehicle sales for the first six months of 2010 compared to that of 2009, when anemic vehicle sales, pressured both GM and Chrysler into bankruptcy protection, and necessitated a government bailout to keep the two companies afloat.  After dramatic restructuring of both company’s operations, a modest increase in vehicle sales for the first six months of 2010 of just 15%, has sparked profits again for the U.S. vehicle manufacturers.

Even with the government’s cash-for-clunkers program beginning last year in July 2009, and giving effect to a seasonally-adjusted-annual-rate (SAAR) of sales of 11.29M vehicles, July 2010′s results have already posted an increase in the SAAR rate to 11.54M vehicles, absent the government’s stimulus program. This should bode well for all U.S. automotive companies in the third quarter, although it will be all but impossible to beat the August 2009 SAAR rate of 14.17M vehicles. With more efficient inventory control improving production schedule efficiency, and with many of the legacy costs that burdened the U.S. automotive companies financial results off-loaded, profits most likely will continue throughout the remainder of 2010 for GM.

The biggest difference in General Motors this year is that U.S. taxpayers have a 61% controlling interest in the company, as a result of the government’s $50B investment made as part of the automaker bailout plan approved by the Obama administration. GM has continued to make progress since the bailout by streamlining its business down to four core brands, and returning to more efficient management of  production and dealer inventories.  General Motors made its third and final repayment of $4.7B to the U.S. government ahead of schedule back in April 2010, along with a repayment to the Canadian government of $1.1B, showing its commitment to removing the negative title of “Government Motors” from its “brand”. The first two payments to the government were for $1 billion each.

To assist its dealers in supporting vehicle sales more directly, GM announced on July 22nd that they had entered into a definitive agreement to acquire AmeriCredit Corp. (NYSE: ACF) in an all-cash deal valued at ~$3.5 billion. The purchase of AmeriCredit by GM represents a return to in-house financing that is aimed at increasing the availability of loans and leases to customers.  With this acquisition, GM will re-establish a vital customer lending service which was lost when GM sold its control of General Motors Acceptance Corporation (GMAC), now known as Ally Financial, back in 2006.

Most analysts of General Motors have been watching progress and financial results closely, looking for important steps to be taken to repay the U.S. taxpayer by successfully returning to the capital markets for funding, and eventually enabling the company to stand on its own. It is anticipated that the company will be filing its prospectus with the U.S. Securities and Exchange Commission (SEC) shortly, outlining the details of its public stock offering and restructuring efforts as it seeks approval. Reports from sources familiar with the situation have estimated the initial public offering (IPO) could be as high as $15B, with the U.S. government potentially selling $10B of its stake in GM in the fourth quarter should the IPO move forward.

One of the financial structures that is viewed as important to be in place prior to the IPO, is GM securing a revolving credit facility to serve as a backstop during the stock offerings execution. On Friday, August 13th it was announced that the company had successfully secured this facility with banks, including Bank of America (NYSE: BAC), Citigroup (NYSE: C), Goldman Sachs (NYSE: GS), JPMorgan Chase (NYSE: JPM), and Morgan Stanley (NYSE: MS). In total, ten banks are reported to have committed to lending $500M each for a period of five years to General Motors, with much of the onerous covenants removed, and replaced with substantial collateral instead. The revolving credit facility is estimated to be $5B as the agreements mature.

Political observers have viewed a filing of the IPO and initial stock offering as a possible victory for President Obama and his administration. As the mid-term elections draw near, and Obama begins to tout the auto bailouts as a success in saving jobs, the GM IPO can serve as ammunition for the President as a concrete example of the policy’s effectiveness. The IPO will be viewed as the beginning of the U.S. taxpayer shedding its 61% stake in GM, while successfully keeping the industry strong and saving American jobs. It being “spun” as a policy success may also be used by Democrat’s battling to maintain seats as they head into the November elections. Government bailouts in general are being used to depict too much government involvement in the private sector, putting pressure on incumbents as they are challenged for their seats in the upcoming election. With Democrats holding the majority in the House of Representatives and Senate, they have more seats to lose as voter anguish is played out in the voting booths. An IPO by GM now would be a nice “bell-to-ring”, symbolizing a successful policy by President Obama and the Democrats who supported the decision to bailout the auto industry at the time.

After the release of GM’s second quarter numbers, Ed Whitacre Jr, current Chairman and CEO of GM, surprisingly announced that he would be stepping down as CEO as of September 1st 2010. He announced his replacement, Mr. Daniel Akerson, a current board director appointed by the Obama administration to oversee and safeguard the government’s $50B investment in the GM restructuring. Mr. Akerson has been a managing director of The Carlyle Group for the past seven years, spearheading some of the private equity firm’s biggest deals. While Whitacre’s departure had been expected, the timing of his announcement caught many off guard, being just one day before the expected paperwork for a landmark stock offering was expected to be filed. It was always anticipated that Whitacre would not be a long-term Chairman and CEO, but most observers and insiders had thought he would stay through the company’s initial public offering execution. In a statement after the conference call,

“It was obvious that I was not going to be at GM for the long haul. We have put a strong foundation in place, so I am very comfortable with my timing.”

Ed Whitacre Jr, Chairman and CEO of GM

Most analysts and observers close to the situation feel that at this juncture, the leadership needed now at GM should be about moving this IPO forward. It is thought that Mr. Akerson’s experience at The Carlyle Group will help to make the task of building investor confidence over the coming months more successful. It is also speculated that the individual that will play a longer term role with GM, should be the person selling the IPO to these investors. Mr. Akerson has been involved in all major decisions made by GM as a member of the Board of Directors since the company emerged from bankruptcy back in July 2009. He does not have any heavy manufacturing experience and is not known as a “car guy,” but he has been the CEO of three other companies in his career. In his current job he is involved in the sometimes difficult to understand world of private equity. He is known to be well connected in the financial community, and with GM preparing for this initial public offering of stock, those connections may be exactly what GM needs.

Position: Long C

Contact the Author: denniscosta@marketplayground.com