Valuing the new GM

To his credit, General Motors’ new chief Fritz Henderson has turned lemons into lemonade, putting a positive public relations spin on the stripping-down of the once mighty company into a leaner one shorn of debts, dud assets and superfluous dealers.

Dropping both sentimentality and the need to give a rah-rah message to investors – the only voluntary ones left anyway are those who inexplicably trade the worthless shares on the pink sheets – his message is for customers and business partners.

Still, unless the Supreme Court rules that Chrysler’s bankruptcy and Fiat sale is invalid, which could in turn halt GM’s plan, Mr Henderson will have fresh private shareholders soon.

The market is therefore figuring out what GM might be worth. It is already clear that the portion of US government cash converted to 60 per cent of new GM equity will yield a poor initial return.

Of the $50bn plus that will ultimately have been committed, the portion converted to equity implies a breakeven value of $67bn for all of GM – more than it was ever worth in nominal terms.

Its only publicly traded security, GM’s unsecured bonds, implies an equity value of about half that, which would be lower still if one imputed the option value of their attached out-of-the-money warrants.

Still, the bond prices imply that GM should be worth about $34bn, some 80 per cent more than Ford or about a quarter of Toyota. Its enterprise value would be lower, but this is flattered by not consolidating a finance subsidiary.

Yet bondholders may be too conservative. True, the new GM is without Saab, Hummer, Pontiac, Saturn or GMAC, and most of Opel. But on an enterprise value to sales ratio, it would be modestly valued compared with competitors.

It is too much to hope that taxpayers will see a positive return on their investment.

But it is entirely likely that today’s buyers of GM bonds may be pleasantly surprised.

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