The easy answer to the question of what US operations of The Big Three are worth is that they are worth nothing. That assessment is entirely accurate based on the current encumbrances of union contracts, debt obligations, and supplier payables. Those are perfect calculations for a simpleton, but they don’t take into account the fact that based on the earnings of all the companies which have done business in the United States over the last two decades, the market is profitable.
Based on the North American sales of Ford (F) and GM (GM) and their share of the market, total vehicle sales in the US will be about $350 billion in 2008. All of the US car companies lose money on their piece of that. It is hard to say what the P&L for the market is for foreign car companies.
But, in a bankruptcy, with most of the unnecessary costs out of The Big Three, and most of their debt obligations gone, their piece of the American market, just shy of 50%, has tremendous value, which may be why companies like Toyota (TM), Honda (HMC), VW, and the Renault-Nissan operation could find the assets of the US companies very attractive.
The American piece of US car sales is about $175 billion now. Looking at the ratio of sales to market value at Honda, 56%, the operations of The Big Three, scrubbed of obligations, would be worth $100 billion. If the margin on the assets could be moved to 10%, or $17 billion, at a seven times operating income valuation, the assets are worth $120 billion.
In 1999, when American car companies were doing well, GM had a market cap of $53 billion. Ford’s was $86 billion.
Bankruptcy may not be the ideal route for creditors, unions, or the current managements of The Big Three, but it may be the only way to unlock over $100 billion in value. And, that does not include their international operations.
Douglas A. McIntyre