GM to drop Pontiac by 2010, trade majority stake to U.S. Treasury

It’s official. Pontiac will be phased out from General Motors’ portfolio by 2010 as revealed today in the carmaker’s updated Viability Plan, designed to speed the restructuring of its operations in the U.S. into a leaner, more customer-focused, and more cost-competitive unit. The latest Viability Plan was included in an exchange offer whereby GM is also offering certain bondholders shares of GM common stock and accrued interest in exchange for certain outstanding notes that total some $27 billion. One of those bondholders is the U.S. Treasury, which, under the plan offered by GM, could leverage its $15.4 billion in already-granted loans and another $11.6 billion in future loans to gain a majority stake in GM.

The Treasury's majority share means it would be able to appoint all of GM's directors, veto shareholder actions and generally dictate how the company is run. The move essentially gives the government a stick from which to dangle its carrot. The transfer of power to the Treasury will likely take place before the June 1 deadline, though it's not yet clear when. Speaking with Motor Authority in a conference call this afternoon, Ray Young said, "The government itself is not involved in the day-by-day operations of General Motors." The White House reiterated that stance today, saying that it has "no desire to run an auto company on a day-to-day basis."

President Obama has previously stated that, "The United States government has no interest in running GM. We have no intention of running GM," but by taking a majority stake in GM under the proposed debt-for-equity deal, it may be obligated to do just that. Beyond the U.S. Treasury's plans, however, GM has its own plans for the future. As Young said today, "Our next job here is to complete the restructuring, start executing the plan, work with the UAW and U.S. Treasury to finalize the VEBA modifications as well as the U.S. Treasury debt conversion and most importantly get through the bond exchange through the month of May."

The latest Viability Plan builds on the original version submitted to the U.S. Treasury back in February, and outlines plans to accelerate the timeline for a number of important actions and make deeper cuts in several key areas of GM's operations.

The main change is a focus on four core brands in the U.S. - Chevrolet, Cadillac, Buick and GMC – and the shedding of almost half of GM’s dealerships, as a result of which the Pontiac brand will be phased out by the end of 2010, leaving GM with a total of 34 nameplates – a reduction of 29% from 48 nameplates in 2008.

Pontiac was one of the easier GM brands to drop due to its relatively small lineup, consisting of just six models, plus the fact that many Pontiac dealership franchises have already been consolidated with Buick and GMC.

The revised plan also moves up the resolution of Saab, Saturn, and Hummer to the end of 2009, at the latest. GM anticipates reducing its U.S. dealer count from 6,246 in 2008 to 3,605 by the end of 2010, a reduction of 42%. Other major cutbacks include reducing the total number of assembly, powertrain, and stamping plants in the U.S. from 47 in 2008 to 34 by the end of 2010 and to just 31 by 2012. Furthermore, U.S. hourly employment levels are projected to be reduced from about 61,000 in 2008 to 40,000 in 2010, and level off at about 38,000 starting in 2011.

GM also plans to continue discussions with the UAW to modify the terms of the Voluntary Employee Benefit Association (VEBA) agreement, and with the U.S. Treasury regarding possible conversion of its debt to stock as well. In total, the U.S. Treasury debt conversion, VEBA modification and bond exchange could result in at least $44 billion in debt reduction.

The cost savings from all the restructuring is expected to allow GM’s North American operations to break even with total industry sales volume of 10 million vehicles. The lower break-even point better positions GM to generate positive cash flow and earn an adequate return on capital over the course of a normal business cycle, a requirement set forth by the U.S. Treasury.