Ford Weighs the Costs of Going It Alone

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No Stock for VEBA

Ford is already known to not want to follow a likely GM scenario of paying half its future obligations to the UAW's Voluntary Employee Benefit Assn., or VEBA, in new stock instead of cash. Ford owes $14.7 billion to the VEBA in future years, and the UAW has agreed to defer payments in 2009 and 2010. GM owes $21 billion. Ford already has 2.4 billion shares outstanding, compared with 610 million shares outstanding for GM.

"Ford's people made it quite clear they did not want to dilute their share value anymore," said Senator Bob Corker (R-Tenn.), who negotiated with all three companies, the UAW, and Congress in an unsuccessful attempt to bail out automakers earlier this month. The VEBA was negotiated in 2007 to eliminate future health-care obligations of retirees from the automakers' balance sheets. The deal, which puts the union in charge of managing a health-care trust fund, will save the companies billions over the next 20 years.

By accepting half the VEBA in stock, the UAW is already looking for a board seat at GM since the union would become a major shareholder. Ford, though it has arguably a better relationship with the union than either GM or Chrysler, wants to avoid having to give over a board seat to the UAW.

Debt Restructuring

The other major factor in GM's likely restructuring plan is for GM debt holders to take a significant "cram down" on the company's debt, perhaps surrendering as much as 70% on the face value of the debt. GM has $43 billion in debt, not including its VEBA liability; Ford has $25 billion in debt. GM's annual interest expense under such a plan could go from $3 billion a year to $1 billion, plus it could save $10.5 billion going forward on the VEBA.

"That's a lot of future cash GM would have in a business that is more dependent than most on big annual capital investments in new products," says Shelly Lombard of GimmeCredit.com. The cost of a typical new-vehicle program today, for instance, is between $500 million and $1 billion.

Ford, according to company officials, would definitely benefit from any wage, benefit, and workplace rule concessions the UAW agreed to with GM and Chrysler. And those savings are significant. Despite huge reductions in head count, both companies have sizable hourly workforces and retirees who pay only about 5% of their health-care costs vs. almost 28% for American families in the private sector who receive coverage through an employer. A concession on those costs adds up to billions saved on future payments.

However, Ford Chief Financial Officer Lewis Booth said exchanging stock for debt right now doesn't look like a good strategy. "Not when the stock is so cheap," he said. Ford shares closed Wednesday, Dec. 17, at 3.14. Ford's market capitalization is about $7.5 billion, or one-third of its outstanding debt.

The Ford Family's Losses

The Ford family controls the automaker by virtue of its 70.85 million shares of Class B stock, which carry 40% voting rights for the entire company. The family's wealth has taken a dramatic hit as losses have mounted at Ford, its stock price has plunged, and the dividend has been suspended.

The family's Class B shares were worth $221.4 million at Wednesday's closing price. A year ago, shares had a value of $532 million. And five years ago, the value of the family's shares was $987 million. Bill Ford personally owns 5.2 million shares.

"If Ford swapped equity for debt, it would substantially dilute the family's value further," says GimmeCredit.com's Lombard. "If the company can hang on, the upside for shareholders, especially the family, is far greater."

Bill Ford says the family's motivation is not purely financial.

"The family has been through every cycle imaginable, including being weeks away from shutting down after World War II," said Ford. "This is much more than a financial investment, it's an emotional investment.…If this was just about a financial investment we would have been out years ago."

Business Exchange related topics:
Ford Motor Company
United Auto Workers (UAW)
Bailout

Kiley is a senior correspondent in BusinessWeek's Detroit bureau.