General Motors Corp's equity may be largely, if not entirely, wiped out as it complies with the restructuring targets laid out in the federal auto bailout, an analyst at Credit Suisse said as he cut GM price target to $1 and rating to "underperform" from "neutral" with a price target of $2. GM shares plummeted 22 per cent yesterday following the analyst's note.
"Over the next two months... it will become increasingly clear that the enormous sacrifice of value on the part of the union and bondholders will require the complete or near-complete elimination of the existing GM equity," analyst Christopher Ceraso wrote in a note titled `Game Over for Existing Equity.'
GM fell 97 cents to $3.52 at 4:01 pm in New York Stock Exchange composite trading, erasing the 23 per cent gain on 19 December after the loan package was announced. The percentage decline was the biggest since 10 November. The stock lost 86 per cent this year, the biggest decline among the 30 companies on the Dow Jones Industrial Average.
The US government on Friday came to the rescue of US automakers with $17.4 billion in emergency loans, some $13.4 billion of which will be made available in December and January, taken from a $700 billion Wall Street bailout fund originally designed to rescue struggling financial institutions. However, the government has attached a string of conditions to the three-year loans and set a deadline of 31 March for the automakers to prove they can restructure enough to ensure their survival or have the loans called back. (See: Bush offers $17.4 billion to bail out GM, Chrysler)
As part of the rescue, GM is required to reduce debt by two-thirds via debt-for-equity swaps, pay half of the contributions to a retiree health care trust using stock, make union workers' wages competitive with foreign automakers and eliminate the union jobs bank, which pays laid-off workers.
"If GM and its stakeholders can navigate through a tricky set of negotiations, and all parties can agree to sacrifice value in a manner consistent with the targets laid out by the government, we still arrive at a discounted cash flow-derived equity value of less than one dollar per share," Ceraso said.
Even with the rescue, it is still uncertain at this point whether a GM bankruptcy has been permanently stayed, Ceraso said. GM is likely to need additional funds as soon as the second quarter of 2009, Ceraso said, adding that this could make it more difficult for the automaker to argue, by the end of the first quarter of 2009, that it has achieved or is on the way to achieving long-term viability.
"What's more, if the bond holders and unions cannot come to an agreement over the amount of value to be sacrificed, GM may still end up in bankruptcy court," Ceraso added. If such an agreement is lacking, the company may still end up in bankruptcy. Additionally, the US government will claim as much as 20 per cent of GM's equity value in exchange for the loans, he said.
Itay Michaeli, an analyst at Citigroup Global Markets Inc, widened his full-year loss estimate for GM to $29.09 a share from $28.92. GM will post losses of $26.46 a share next year and $7.63 in 2010, down from earlier estimates of a $15.22 deficit and a 3-cent profit, respectively, Michaeli said in a note to clients. He has a ''sell'' rating on the shares.
An analyst at Deutsche Bank voiced similar concerns. "Failure to convince creditors to voluntarily exchange debt for equity could necessitate the involvement of a bankruptcy court," said the Deutsche Bank analyst, who has a "sell" rating on the stock.