Report May Provide Last Look at Old GM

GM, which reports first-quarter earnings Thursday, is going to look very different by the time its second-quarter earnings are posted.
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Updated from 1:19 p.m. EDT

In a sense, the sun will set Thursday on

General Motors

(GM) - Get Report

as we know it.

In its first-quarter earnings report Thursday, the largest U.S. automaker will likely report a large loss. But the numbers will be mostly irrelevant, the last vestiges of a century-old company that is about to be radically transformed under a plan that at the moment is drawing complaints from most of its key constituents.

In bankruptcy, out of bankruptcy or whatever, GM is going to look very different by the time its second-quarter earnings are posted.

GM's latest transformation plan, unveiled last week, calls for a company with 22,000 fewer workers, 42% fewer dealers, and annual costs $1.8 billion lower envisioned in a Feb. 17 plan.

GM faces a June 1 deadline, imposed by the Obama administration, its lender of last resort, to get stakeholders to approve. Their option is bankruptcy. While backed by the administration and management, the plan came under sharp attack on Tuesday, an indication that the battle will likely intensify as the deadline approaches.

The United Auto Workers, who would own 39% of the new company, oppose the job losses. The union "strongly objects to GM's restructuring plan because it essentially means that GM will be shifting more of its manufacturing footprint from the U.S. to Mexico, Korea, Japan and China and importing more of the vehicles it sells in the U.S. market from these countries," said UAW legislative director Alan Reuther, in a letter to U.S. senators posted Tuesday on the union's web site.

Shares of GM closed down 19 cents to $1.66 Wednesday.

"GM should not be taking taxpayers' money simply to finance the outsourcing of jobs to other countries," Reuther wrote.

For bondholders, the offer of 10% of the new GM in return for $27 billion in unsecured holdings is "grossly unfair to the point of abuse," Credit Sights analyst Glenn Reynolds wrote in a report released Tuesday.

The principal problem, Reynolds writes, is that a better deal is being offered to the Voluntary Employee Beneficiary Association, a retiree health care trust fund administered by the UAW. It would get 39% of the new GM plus $10 billion to cover $20 billion in health benefit obligations.

The plan "is widely perceived in the market as a pure government mandated wealth transfer from bondholders to the UAW for political gain," Reynolds said. He says bondholders should refuse, because "It is better to get a $27 billion seat at the table rather than a 10% equity seat in the waiting room."

On the equity side, existing shareholders would get 1% of the new GM. This is good news only in the limited context that equity holders are normally wiped out in bankruptcy: When the plan was announced last week, the shares jumped 10%.

In reality, the shares are largely worthless, says Standard & Poor's analyst Efraim Levy. "Unfortunately, for GM current shareholders, we do not expect them to meaningfully share in any recovery," Levy wrote, in comments released Tuesday.

Analysts surveyed by Thomson Reuters estimate GM will lose $11.05 in the first quarter, with revenue down 52% to $20.2 billion.

Yet "no matter how bad the earnings are, it's irrelevant," says Jeremy Anwyl, CEO of Edmunds.com, an automotive information Web site. "This is not a regular earnings call. There is a lot of cleaning up going on -- shutting plants, cleaning out inventory -- a lot of bad news. The new CEO wants to get the bad news out of the way. Then they can look forward in a positive way."

In fact, Anwyl sees a promising future, largely because he does not believe the dramatic reduction in auto sales of the past six months can be sustained. In his view, the strong used-car market is a harbinger of a stronger new-car market.

With about 30% of all automotive buyers using Edmunds.com, Anwyl sees that "people are going through behaviors associated with shopping for new cars, and then they are buying used cars when they go into the dealership." He says new car dealers and sales people are incented to sell the used cars, which produce higher profits and higher commissions.

Yet "right now some used cars are more expensive than new cars, particularly with the lower loan rates" for new cars, Anwyl says. "As consumers realize that used cars are not the bargain they think, they will buy new cars." That, he says, could add 2 million vehicles a year to the current seasonally adjusted annual sales rate of about 9.6 million. Last week, CEO Fritz Henderson said that under its transformation plan, GM could break even at an annual sales rate of 10 million vehicles.