By Don Miller
Associate Editor
Money Morning
A federal judge handed the Obama administration an important victory in its push to steer the automobile industry back to health Sunday, approving the sale of General Motors Corp.'s (OTC: GMGMQ) most profitable assets to a new government-run company.
The move removes an important barrier to the company's plan to exit bankruptcy.
Judge Robert E. Gerber of the U.S. Bankruptcy Court for the Southern District of New York issued a ruling saying the sale was GM's only option and that it would "prevent the death of the patient on the operating table," according to Reuters.
The 87-page ruling rejected appeals from a group of bondholders, tort claimants and unions who had objected to the plan.
"As nobody can seriously dispute, the only alternative to an immediate sale is liquidation -- a disastrous result for GM's creditors, its employees, the suppliers who depend on GM for their own existence, and the communities in which GM operates," Gerber said in the opinion.
When the sale is completed, it would transfer GM's "good assets" - including the Chevrolet, Cadillac, Buick and GMC brands - to a new company majority-owned by the U.S. Treasury. It would also pave the way for the new GM to exit bankruptcy in less than two months, one month earlier than the government's projection.
The plan would allow the company to jettison unwanted property to the old GM, including 16 automotive plants in Delaware, Ohio, New York, Indiana, Pennsylvania, Virginia and Michigan. The Treasury will also provide the estate with $1.175 billion to unwind the remaining assets, up from original projections of $950 million after creditors complained about possibly getting stuck with liquidation costs.
The U.S. government would own 60% of the new GM in return for $50 billion in loans, the Canadian government would get 11.7% for $9 billion in loans, and workers would receive a 17.5% stake for relinquishing future health-care benefits.
Bondholders would be forced to convert about $27 billion in bonds into about 10% of stock in the new company, plus warrants with a total value of $7.4 billion. New GM's total equity is anticipated to be worth more than $38 billion, according to Bloomberg News.
During three days of hearings, the workers and bondholders objected to the plan, saying the "new GM" is just "old GM" minus a slew of liabilities. They contend the company would market nothing new, pedaling the same cars and trucks, made by the same workers managed by the same executives.
Gerber dismissed the bondholders' assertion that GM should restructure under a Chapter 11 reorganization plan, which would let creditors vote on details of the plan, saying the argument was unrealistic.
"In the event of liquidation, creditors now trying to increase their incremental recoveries would get nothing," he ruled.
Gerber's ruling also torpedoed arguments from dealers whose contracts are being terminated, groups of car-accident victims who said they would now be unable to sue GM for their injuries, and others who claimed that the U.S. government had been overbearing in its negotiations to restructure the automaker.
Gerber issued a typical four-day stay of the order approving the sale, which allows for possible appeals.
Steve Jakubowki, a lawyer for product-liability claimants said he would appeal the ruling even though GM recently revised its bankruptcy plan to take on claims from future car-accident victims.
"This issue is too important, too unsettled and too many people's lives hang in the balance for me not to pursue this appeal through to the end," Jakubowski told The Wall Street Journal.
Gerber ruled that the sale could be "free and clear of claims," because his hands were tied by precedents established in the second judicial circuit during the bankruptcy filed by Chrysler LLC. The second judicial circuit encompasses Gerber's court.
But in the end, Gerber concluded that the government's plan was the only one that makes sense.
"GM cannot survive with its continuing losses ... and without the governmental funding that will expire in a matter of days," Gerber wrote.
The ruling marks the second big victory for the Obama administration's auto task force, which will be charged with supervising the liquidation of the remaining assets. The task force had previously engineered the sale of Chrysler to a consortium headed by Italy's Fiat S.p.A. (ADR OTC: FIATY).
News and Related Story Links:
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Reuters:
Judge approves sale of GM assets -
Bloomberg:
GM Wins Approval to Sell Most Assets to U.S. Treasury -
Wall Street Journal:
GM Asset Sale Gets Judge's Nod