In order to extricate itself from billions in health-care obligations, Ford may be forced to make the UAW its largest single shareholder
Ford Motor (F) reached a tentative agreement, announced Monday, with the United Auto Workers to pay $6.6 billion in obligations to the union's health-care trust fund in stock. The agreement could pave the way for the union to become Ford's largest single shareholder.
The deal was struck with Ford ahead of similar current negotiations with General Motors (GM) and privately held Chrysler, which are both negotiating with the U.S. Treasury over continued taxpayer loans to the troubled automakers. GM and Chrysler are also trying to secure deals to reduce the face value of bonds. If they can't get concessions from the UAW and bond holders, GM and Chrysler risk being forced into bankruptcy court.
While it is common in some European countries for union officials to have board seats, it is practically unheard of in the U.S. Daimler-Benz (DAI), Volkswagen (VOWG), and BMW (BMWG), for example, all have a representative of organized labor on their supervisory boards. And the UAW, when Chrysler was owned by Daimler, had a board seat at the German automaker.
Staying Out of Bankruptcy
But the notion that the union would have such power in the boardroom would have struck generations of Detroit executives—not to mention labor leaders—as inconceivable. Yet while Ford has not applied for government loans from the Troubled Asset Relief Program (TARP), it is restructuring its debt obligations anyway in an attempt to lower costs further, preserve cash, and avoid government loans and bankruptcy court. In a recent interview with BusinessWeek, Ford CEO Alan Mulally said: "We will make sure in all of this that we don't end up being disadvantaged to our competitors."
In 2007, Ford, as well as GM and Chrysler, struck deals with the UAW to reduce billions of dollars in future health-care obligations from its balance sheet. The changes reduced the companies' liabilities for retiree health care by 50%, according to the UAW. In return, the companies promised to make huge lump-sum payments into the trusts to cover much of the retirees' plans. Ford, for instance, paid $2.7 billion into the union's Voluntary Employment Benefits Assn. (VEBA) in January, but owes a total of $13.2 billion to the VEBA, according to Ford, over the next few years. GM is due to make a payment of about $7 billion in 2010, and owes the union a total about $22 billion.
The Ford deal could act as a template for negotiations with GM and Chrysler—except for one hurdle. GM and Chrysler are negotiating with the union at the same time they are dealing with bond holders for concessions, and neither wants to give up more than the other, even with the prospect of Chapter 11 hanging over the company. Ford is not yet negotiating with its debt holders for a "haircut" on the company's debt, according to Ford officials. A haircut, also known as a "cram down," means those holding debt will accept a reduction on the face amount of the bonds. The U.S. Treasury is looking for bond holders to take 30¢ on the dollar for GM's and Chrysler's unsecured debt, while GM's bond holder committee has been fighting for 50¢.
UAW Ford's Biggest Shareholder?
While Ford's deal with the UAW shows Wall Street and Washington that it is making progress lowering its union costs, the company is hoping to exchange as little stock for its cash obligations as possible. Ford's stock is trading at all-time lows and closed on Feb. 23 at $1.73 per share. Its market value on Monday was just barely above $4 billion. (GM's was a distressing $1.1 billion.) By today's share price, Ford, if it availed itself of the maximum terms of the deal, would pay more to the UAW in stock than all of the company's shares are worth today. "We will consider each payment when it is due and use our discretion in determining whether cash or stock makes sense at the time, balancing our liquidity needs and preserving shareholder value," said Ford spokesman Mark Truby in a written statement.
The UAW could become Ford's biggest single shareholder, thus giving the union the right to demand a seat on Ford's board. Ford officials and the UAW have not said yet if a board seat will be part of the settlement.
Ford has two classes of stock. The Ford family controls 40% of the voting shares of the company through Class B shares, which only family members hold. William C. Ford Jr., the great-grandson of founder Henry Ford, is the executive chairman of the company.
But it could be an interesting experiment. If the UAW does get a board seat, for the first time ever at Ford, the best interests of both management and labor would be truly aligned.