If a camel is a horse created by committee, we can only wonder what will become of General Motors (NYSE: GM ) and Chrysler. The two iconic car companies are being carved up so deeply that what remains will hardly be recognizable.
The government will own 10% of Chrysler, but half of GM. The unions will own about a third of GM, but more than half of Chrysler. Bondholders are getting just pennies on the dollar for their loans, but a 5% stake in Chrysler and 10% of GM. I can't wait for the next round of labor contract negotiations, when the UAW sits on both sides of the bargaining table and has Congress sitting as a partner as well. That's going to be a hoot!
Chrysler driven to distraction
The problem is that Chrysler is staring down an April 30 deadline (that's tomorrow) to offer up a viable plan to keep it out of bankruptcy. President Obama's auto task force was able to persuade three-quarters of Chrysler's lenders to accept just pennies on the dollar for their loans, in exchange for a 5% equity stake in the car company. Considering that most of those lenders were also TARP recipients, it's not so surprising they agreed to accept far more lenient terms than what they had originally proposed.
Everyone's hot on Fiat being Chrysler's savior, though no one says exactly how it's going to miraculously transform the carmaker. The arrangement gives Fiat access to Chrysler's dealers and distributors, and Chrysler gets some cash. Mercedes-Benz maker Daimler (NYSE: DAI ) wasn't able to make a go of it; what makes everyone so sure Fiat can? Did we want to drive Fiats even when they were sold here? The agreement being cobbled together looks more like duct tape on the radiator hose -- simply a patch to get you to the next service station.
If the deal goes through, Fiat will get a 20% stake in Chrysler, with an option to raise it to 35% later on. The union's health-care trust fund will receive a 55% portion in exchange for slicing in half the $10.6 billion payment it is owed by Chrysler. About the best that can be said is that the likelihood of a bankruptcy filing grows slimmer.
GM = Government Motors
GM wants to give the government half of the equity in the car company, in exchange for an additional $11.6 billion in loans. The union would get a 39% stake, as GM would pay its $20 billion health-care trust fund tab with stock instead of cash, while GM's bondholders would also become part-owners if they swap as much as $27 billion in unsecured debt for a 10% slice.
Both carmakers face pressure from the federal auto task force to be more aggressive in reorganizing their businesses, but the idea that politicians think they can run one car company competently, let alone two, is further disturbing evidence that they're actually asleep at the wheel.
A Ford in your future?
The winner in all this remains Ford (NYSE: F ) . The $1.8 billion loss it posted late last week was much smaller than what analysts had predicted. Ford halved its use of cash, ending the quarter with more than $21 billion in the bank. That has CEO Alan Mulally suggesting that the carmaker is ahead of its plan to return to profitability by 2011.
Despite the federal government’s apparent attempts to stack the deck in GM's and Chrysler's favor by giving them taxpayer-backed, low-interest financing, Ford was able to overcome the hurdles set in front of it. Indeed, if the president's auto task force is successful in its desire to shut down the GMC truck line, analysts believe that Ford's F-150 pickup will benefit, since it is typically the second choice of truck buyers who consider GM's Sierra pickup.
Yet the U.S. auto industry is still ailing, despite whatever signs may be at hand that the situation is stabilizing. Retail auto sales dropped 33% over the first two weeks of April, bringing the annualized rate to 7.8 million cars. Ford's own sales were off 43%, causing it to lose $637 million in North America. Ford saw its market share slip further in the first quarter, while foreign car manufacturers Toyota (NYSE: TM ) , Honda (NYSE: HMC ) , and Nissan (Nasdaq: NSANY ) all gained. And Ford's overall losses were still pretty steep. All the same, it doesn't need a government handout to keep going.
A trip down memory lane
My very first car was a 1972 Pontiac LeMans. We'd drive it down a back road, shut off the car's headlights, and navigate the winding path in pitch darkness. It made for a thrilling, dangerous, and ultimately foolhardy, ride. Watching politicians try to steer Detroit from Washington makes me think I'm back on that same dark road again. But this time, I'm not so sure we'll survive the return trip.