GM Stock: GM equity may be wiped out: Credit Suisse
Monday December 22, 10:54 am ET
(Reuters) - General Motors Corp's (NYSE: GM Stock)
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 his price target to $1 and rating to
"underperform."
GM shares fell as much as 16 percent to $3.76 in morning trade Monday on the New York Stock Exchange.
"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."
The U.S. government on Friday came to
the rescue of U.S. 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.
The
government attached a string of conditions to the three-year loans and
set a deadline of March 31 for the automakers to prove they can
restructure enough to ensure their survival or have the loans called
back.
"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.
Ceraso previously rated the stock "neutral" with a price target of $2.
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.
Even with the rescue, it is still uncertain at this point whether a GM bankruptcy has been permanently stayed, Ceraso said.
A
key stipulation in the aid package for the cash-strapped automakers is
that the loans could be called back if they cannot meet all the
conditions and prove they are viable by March 31.
While the
automakers are allowed to deviate from some of the concession targets,
they still must achieve long-term viability -- measured as positive net
present value -- with or without deviations.
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 can not come to an agreement over the
amount of value to be sacrificed, GM may still end up in bankruptcy
court," Ceraso added.
GM shares were down 68 cents at $3.81. They
have shed 82 percent since the start of the year through Friday, hurt
by a global recession and tight credit conditions.
(Reporting by Tenzin Pema in Bangalore; Editing by Mike Miller, Himani Sarkar)
