No Silver Bullet

Hold those cheers for Renault-Nissan-GM

When Kirk Kerkorian proposed the sale of a stake in General Motors (GM ) to Renault and Nissan (NSANY ) on June 30, fellow GM investors cheered as though the troubled U.S. icon had a new lease on life, sending its stock up 8.5%. But before GM turns around, it will have to deal with a chronic and familiar problem that a tricontinental alliance can't fix: employee retirement benefits.

An investment by Renault and Nissan Motor Co., the French and Japanese companies that own stock in one another and are allied through a common chief executive, Carlos Ghosn, won't make a dent. Never mind GM's $30 billion in debt. It has an even bigger obligation that's not even on the balance sheet: post-employment health benefits, which amount to $42 billion, estimates Rod Lache, an analyst at Deutsche Bank (DB ). That's more than 12 times the $3.3 billion investment that Renault-Nissan would make if they were to buy even 20% of GM stock at its recent market value of $16.5 billion.

Let's say Renault-Nissan delivered all $3.3 billion in cash. So what? Last year, GM's car business burned $6.7 billion; next year, analysts estimate, it will hemorrhage as much as $4 billion.


GM is still the world's No. 1 automaker by market share. Yet it's worth only $16.5 billion, compared with $170 billion for No. 2 Toyota Motor Corp. (TM ). That's indicative of just how many claims weigh on GM's assets. Besides the $42 billion in retiree obligations and $30 billion in debt, GM is on the hook to former subsidiary Delphi Corp. (DPH ) for $6 billion to $12 billion. (These figures exclude GMAC, its financing arm, most of which is being sold.) All claims considered, GM's stock accounts for a quarter of its so-called enterprise value, or theoretical takeover price. Enterprise value includes debt and other liabilities, less cash, that would be assumed by a buyer. It offers a sobering glimpse into the Renault-Nissan deal: Despite the 8.5% jump in GM stock, the market saw it adding only 2.1% to the value of the company.

Analysts say that if GM can shrink its production capacity and win relief from retiree obligations, there could be value in an alliance. Given a few years, cost savings, shared research, and brand consolidation could boost profits. Glenn L. Reynolds, debt and auto industry analyst at CreditSights Ltd., says Kerkorian's proposal could spur investors to focus not only on whether GM will survive but also on how it might best be part of the consolidation of the global auto industry.

It's a good point. GM used to be the one putting up the money in alliances. Now it's the one that's taking it. At this juncture, that's the turnaround worth celebrating.

By David Henry

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