General Motors (MTLQQ), or GM, has withdrawn applications for loan guarantees of €1.8 billion ($2.2 billion) from several European countries, including Britain, Germany and Spain, to fund its Opel/Vauxhall business in Europe after Germany rejected its request for aid. The automaker has now decided to fund the business on its own based on improved finances.
GM’s bailout plans for Opel took a twist in November last year when the automaker stalled its plan to sell a 55% stake in the unit to Magna International, Inc. (MGA), backed by Russia’s Sberbank, and decided to continue running the unit on its own.
GM had been in a dilemma while choosing Magna as the preferred bidder for Opel. It was afraid of losing Opel’s technology to the Russian car industry. If Magna had won the deal, GM would have lost Russia’s increasingly important market for its models, such as Chevrolet. Secondly, it would have lost Opel’s engineers, who are integral to GM’s overall strategy.
Magna and Sberbank were planning to manufacture Opel cars in Russia with the biggest automaker in the nation – Gaz Group – jointly owned by the tycoon Oleg Deripaska and Avtovaz (partly owned by France’s Renault).
However, the German government preferred Magna, which had promised not to close any of the four Opel plants in the country. As a result, GM’s decision to run the unit on its own has irked the German government, which had agreed to offer a bridge loan of €1.5 billion ($1.8 billion) for the deal.
GM announced restructuring measures soon after it decided to run the unit on its own. These measures would cost about 9,000 jobs across Europe and reduce output by about 20%.
The automaker had revealed that it would require €3.3 billion ($4 billion) in European government aid for the restructuring actions. Following the German government’s rejection of the aid, GM has decided to meet the total restructuring funding for the business using its own and improved finances.
In the first quarter of the year, GM posted a profit of $865 million or $1.66 per share, a sharp contrast to a loss of $6 billion or $9.78 per share in the last year’s quarter. This was the automaker’s first quarterly profit since 2007.
Revenues in the quarter surged 40% to $31.5 billion on strong sales of new models, including the small sport utility vehicle Chevrolet Equinox and the luxury sedan Buick LaCrosse.
GM’s North American operations and International operations reported an EBIT of $1.2 billion each. However, the company’s European operations recorded a loss before interest and taxes of $500 million.
GM’s cash flow from operations was $1.7 billion during the quarter. The company’s free cash flow was $1 billion after adjusting for capital expenditures of $700 million. This led to cash and marketable securities of $35.7 billion at the end of the first quarter.
The new GM was formed after emerging from bankruptcy on July 10, 2009 through the acquisition of substantially all the assets and certain liabilities of Motors Liquidation Company or the old GM.
Post bankruptcy, GM is primarily owned by the U.S. government and Canadian government, and by a trust fund providing medical benefits to United Auto Workers (UAW) retirees. The U.S. government holds a 61% stake, the UAW union holds a 17.5% stake through its Retiree Medical Benefits Trust and the Canadian government holds 11.7%. The remaining shares went to the bondholders of the old company.
GM received $52 billion in U.S. Treasury (“UST”) loans by selling a 61% ownership stake of the company and C$1.5 billion ($1.5 billion) in Export Development Canada (“EDC”) loans while going through the bankruptcy protection.
In April this year, GM repaid $8.1 billion in loans to the governments of U.S. and Canada, ahead of the scheduled maturity date of July 2015. The repaid amount constituted $6.7 billion in UST loans as well as $1.4 billion in EDC loans that it had received last year.
GM has vowed to repay the remaining $45.3 billion to the U.S. government and $8.1 billion to the governments of Canada and Ontario through a public stock offering, perhaps later this year. On the other hand, the U.S. government is considering the option of getting back the remaining loan amount by selling its stake in the company.
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