General Motors, the humbled auto giant that has been part of American life for more than 100 years, will file for bankruptcy protection Monday in a deal that will give American taxpayers a 60-per-cent ownership stake and expand the U.S. government’s reach into big business.
Underscoring the government’s extraordinary role, President Barack Obama planned to announce his support for GM’s restructuring strategy at a midday appearance at the White House, much as he did in April when Chrysler sought court protection.
GM president and CEO Fritz Henderson planned to hold a news conference in New York immediately following Obama’s announcement.
In Canada, Prime Minister Stephen Harper will make a joint announcement in Toronto with Ontario Premier Dalton McGuinty and Federal Industry Minister Tony Clement.
Administration officials said late Sunday the U.S. federal government would pump $30 billion dollars into GM as it makes its way through bankruptcy court. That’s besides the $20 billion in taxpayers’ money that the Treasury already lent to the automaker.
The money would come from what remains of the $700 billion rescue fund for the financial sector.
A second person familiar with the details said the Canadian government would take a 12.5-per-cent stake in GM and a United Auto Workers trust for health care expenses would get 17.5 per cent. Bondholders would receive a 10-per-cent stake with the possibility of increasing their share to 25 per cent.
The officials, speaking on condition of anonymity in advance of Obama’s public remarks, said the administration expects the court process to last 60 to 90 days. If successful, GM will emerge as a leaner company with a smaller work force, fewer plants and a trimmed dealership force. The company will stick with its four core brands — Chevrolet, Cadillac, Buick and GMC and jettison the others.
The company plans to cut 21,000 employees, about 34 per cent of its work force, and reduce the number of dealers by 2,600. It wasn’t immediately clear how many, if any, of the workforce and dealership reductions would be made in Canada.
“There is still plenty of pain to go around, but I’m confident this is far better than the alternative,” Democratic Senator Carl Levin of Michigan said Sunday after being briefed about the developments by the president. “It’s a new beginning, it’s a rebirth, it’s a new General Motors.”
The U.S. government’s ownership stake and huge financial injection represents yet another remarkable intervention into the American private sector. The Treasury has stepped in to help banks, it has taken majority ownership in insurance conglomerate American International Group and it has guided Chrysler through bankruptcy protection proceedings.
Despite its sizable ownership, administration officials said the government intends to stay out of day-to-day management decisions. It says it intends to shed its ownership stakes “as soon as practicable.”
“Our goal is to promote strong and viable companies that can quickly be profitable and contribute to economic growth and jobs without government involvement,” a fact sheet issued by the White House and the Treasury Department said.
Still, it was the Obama administration that instructed GM to trim itself to a point that it could break even by selling 10 million cars a year. It’s current break even point is 16 million cars.
GM plans to name turnaround executive Al Koch to serve as its chief restructuring officer to help the company through bankruptcy protection, said a person familiar with the matter. The person, who spoke on condition of anonymity, was not authorized to speak about the appointment publicly.
Koch, a managing director with AlixPartners LLP, is a veteran turnaround specialist who helped Kmart Corp. through its Chapter 11 reorganization. He will lead the separation of the automaker’s assets into a “New GM” and the remaining parts of the company that will form “Old GM.” Koch will lead the management team that winds down the “Old GM” company once the automaker emerges from bankruptcy.
A majority of the Detroit automaker’s unsecured bondholders have accepted a deal viewed as crucial to reorganization, and Germany agreed to loan $2 billion to GM’s German unit, Opel, as part of its acquisition by a Canadian auto parts supplier.
The moves don’t change much for GM, but better prepare it for a bankruptcy protection filing, said Rebecca Lindland, an auto analyst for the consulting firm IHS Global Insight.
“The more agreements GM has with its interests, the better the bankruptcy is going to go,” she said. “It’s not a game changer at all.”
On Sunday the group of large, institutional bondholders, representing 54 per cent of GM bondholders, agreed to exchange their unsecured bonds for a 10 per cent stake in a newly restructured company, plus warrants to purchase a greater share later. They had balked at an earlier offer, that gave them 10 per cent of the company without the warrants.
Beyond the bankruptcy announcement Monday, GM is expected to reveal 14 plants it intends to close and name the buyer of its Hummer division. One of those plants, however, will reopen as a new small car factory. The decision to build the new car in the United States appears to address previous labour and congressional concerns that GM was considering importing a small car from its plants in China.
By building the car in the U.S., the share of U.S. produced cars for U.S. sale will increase from 66 per cent to more than 70 per cent.
In Germany on Sunday, the government agreed to loan GM’s Opel unit $2.1 billion, a move necessary for Magna International Inc. to acquire the company.
The Canadian auto parts supplier Magna will take a 20 per cent stake in Opel and Russian-owned Sberbank will take a 35 per cent, giving the two businesses a majority. GM retains 35 per cent of Opel, with the remaining 10 per cent going to employees.
The German funds are available to Opel immediately, as it attempts to shield itself from cuts as GM files for bankruptcy protection. Opel employs 25,000 people in Germany, nearly half of GM Europe’s work force. Under the deal, four factories in Germany would stay open saving jobs.
But jobs in other European countries may not be safe, Lindland said.
“As those (German) jobs are becoming protected, other jobs in other parts of Europe are put at risk,” she said.
The company made a huge stride toward restructuring Friday when the United Auto Workers union agreed to a cost-cutting deal. It reached a similar deal with the Canadian Auto Workers earlier in May.
In a typical Chapter 11 bankruptcy case, the company files a plan of reorganization that must be voted on by creditors. In each class of creditors, the plan would have to be approved by holders of two-thirds of the claims and a majority of the number of individual creditors who vote.
But the GM case is anything but ordinary, and it appears the company will sell some or all of its assets to a new entity that would become the new GM, rather than submit a plan to reorganize the old company.
GM’s stock tumbled to the lowest price in the company’s 100-year history on Friday, closing at just 75 cents after trading as low as 74 cents. In a Chapter 11 bankruptcy reorganization, the shares would become virtually worthless.