GM Tumbles as Deutsche Says It May Become Worthless

Nov. 10 (Bloomberg) — General Motors Corp. plummeted as much as 31 percent and moved toward its lowest level in 62 years after a Deutsche Bank AG analyst downgraded the shares, saying they may be worthless in a year.

“Even if GM succeeds in averting a bankruptcy, we believe that the company’s future path is likely to be bankruptcy-like,” Deutsche Bank’s Rod Lache wrote today in a note. The New York analyst recommended selling the shares and cut his 12-month price target to zero. He previously advised holding the stock.

The decline shows mounting pessimism that a turnaround will succeed at the largest U.S. automaker amid the credit crisis and the worst sales market in at least 15 years. GM is petitioning the U.S. government for aid after saying last week it may not have enough cash to operate this year. A bankruptcy typically wipes out the value of a company’s shares.

Barclays Capital and Buckingham Research Group cut their price targets for GM to $1.

GM, based in Detroit, lost 99 cents, or 23 percent, to $3.37 at 2:45 p.m. in New York Stock Exchange composite trading. It fell as low as $3.02 in intraday trading, which would be the lowest close since Nov. 22, 1946, according to Global Financial Data in Los Angeles. Ford Motor Co. dropped 9 cents to $1.93.

“We believe any government assistance would likely significantly dilute GM’s equity,” said Chicago-based Barclays analyst Brian Johnson, who reduced GM to “underweight” from “equal weight” and lowered his price target from $4.

Government Support

GM, Ford and Chrysler LLC, owned by Cerberus Capital Management LP, appeared over the weekend to be moving closer to gaining that federal aid. U.S. House Speaker Nancy Pelosi of California and Senate Majority Leader Harry Reid of Nevada wrote Treasury Secretary Henry Paulson to urge that bank-bailout funds be opened up for loans to automakers.

Rahm Emanuel, chief of staff to President-elect Barack Obama, said the U.S. auto industry “essential” to the economy.

While Emanuel stopped short of endorsing such a plan, the White House today signaled its opposition, saying aid to the industry wasn’t discussed during the debate on the banking bailout. Congress may take up automaker assistance when it returns next week.

“GM’s only salvation is a capital injection from the government,” said Buckingham analyst Joseph Amaturo in a note today, cutting the automaker’s share-price target to $1 from $3. “The company liquidity position is dwindling rapidly given the automotive cash burn,” said the New York-based analyst, who rates GM shares “underperform.”

Liquidity Support

GM’s 8.375 percent bond due in July 2033 rose 1.75 cents to 25.75 cents on the dollar, or less than half its price of two months ago, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The bond yielded 32.5 percent.

“Shareholders are likely to be wiped out, effectively,” Bruce Zirinsky, co-chairman of the financial restructuring department of Cadwalader, Wickersham & Taft LLP, said in a phone interview from New York. “If you look at the GM debt, it’s trading at a substantial discount, at stress prices.”

GM, in a regulatory filing today, said the global economic and credit turmoil requires the company to find “additional near-term liquidity support.”

“Based on our estimated cash requirements through December¬†31, 2009, we do not expect our operations to generate sufficient cash flow to fund our obligations as they come due, and we do not currently have other traditional sources of liquidity available to fund these obligations,” GM said.

Dealers Petitioned

GM asked dealers to petition the U.S. Congress for funds for the industry, saying the credit crisis is preventing automakers and suppliers from getting needed loans.

The automaker offered a proposed letter on its Web site suggesting dealers say that “helping our industry in the short term will have a much lower cost than addressing the effects of a failed industry in the midst of an economic turnaround.”

GM hasn’t posted an annual profit since 2004 and sales in the U.S., its largest market, have declined every year since 1999.

Implied volatility for GM options exceeded 300, a level Lehman Brothers Holdings Inc. topped before its bankruptcy filing and American International Group Inc. reached prior to the U.S. government’s bailout. Implied volatility, the gauge of option prices for GM at-the-money contracts expiring in 30 days, climbed 43 percent to 326.97 at 2:40 p.m. in New York, according to data compiled by Bloomberg.

GM’s November $3 puts were its most-active contracts, with 15,550 changing hands. They more than doubled to 70 cents. December $2.50 puts jumped 62 percent to 89 cents. The contracts give the right to sell GM shares for a certain amount by a given date.

To contact the reporter on this story: Greg Bensinger in New York at gbensinger1@bloomberg.net; Sarah Thompson in London at sthompson17@bloomberg.net

Last Updated: November 10, 2008 14:46 EST
By Greg Bensinger and Sarah Thompson

Source: Bloomberg

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