This earlier post on General Motors’ descent into a possible (probable?) bankruptcy case speculated that car buyers would be relunctant to make a long-term purchase of an asset from a bankrupt company. Related posts on GM’s financial problems are here.
Backing up that speculation is this Autoblog post noting that only 26% of those polled in a recent Directions Research Inc. survey of over 1,000 randomly-selected adults said that they would purchase or lease a new car from an automaker that had gone into the tank. Lower-income buyers said that they were less likely than more affluent buyers to buy a car from a bankrupt automaker as just 20% of those earning under $25,000 a year would buy or lease a car from a debtor-automaker while almost a third of those earning more than $100,000 said that they would do so.
GM appears to be lurching to that most unfortunate position of needing to wash through a reorganization case, but not being in a position to afford the cost of the financial cleansing.
Meanwhile, the “B” word is a prominent part of this recent interview with GM CEO, Rick Wagoner.

With the filing of the Calpine chapter 11 case, the word “bankruptcy” is in the news again and it is increasingly being associated with the name “General Motors.” Prior posts on the risk of GM’s insolvency are here.
GM shares fell to their lowest level since October 1987 yesterday, eventually closing at $19.85, down almost 6% from the previous day’s closing price. In related news, Toyota Motor announced that it plans to produce a record 9.06 million cars next year, which is about the same as the 9.1 million cars and trucks that GM plans to make this year. Unfortunately for GM, Toyota will produce the same number of vehicles as GM while operating under far superior financial circumstances. Toyota’s $142 billion balance sheet reflects $84 billing in equity (with only a sixth of GM’s debt), while GM’s $480 balance sheet includes only $28 billion in equity. Just to put the icing on this very bad GM cake, the United Auto Workers union this week is preparing to send a letter to GM retirees informing them that GM faces a “serious risk of bankruptcy” if it doesn’t obtain relief from burdensome health care costs.

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The fallout over the demise of commodities trader Refco reached the private-equity firm Thomas H. Lee Partners yesterday as its founder and chairman, Thomas H. Lee, departed the company to set up his own rival private-equity firm (W$J article here). Previous posts on the Refco case are here.
Over the past several years, Mr. Lee has taken a lessened role in Thomas H. Lee Partners’ business as a three person board has managed the firm. However, Mr. Lee’s break with the firm comes just weeks after the firm’s $500 million investment in Refco during 2004 became essentially worthless as the commodities-trading company collapsed in an accounting scandal earlier this fall.
Mr. Lee’s move is occurring at a volatile time for private-equity industry, which is really an outgrowth of the financing techniques that Micheal Milken and investment bank Drexel Burnham developed in the 1980’s to spur realization of shareholder value. Private-equity investors purchase controlling stakes in companies on the bet that the value of the stake will increase, often in connection with a public offering. As a result, private equity firms are accumulating huge pools of cash to invest and some of bigger firms now control companies that generate aggregate revenue that is on par with some of the largest U.S. conglomerates. Nevertheless, as more money flows into these private equity firms, the competition for the good prospects increases, which means that more mistakes — such as Thomas H. Lee Partner’s ill-fated investment in Refco — are more likely to occur.

In a widely-anticipated move, Calpine Corp. filed a chapter 11 case the Southern District of New York yesterday (I’ll bet getting a case of that size filed during the N.Y. transit strike was fun) to restructure over $17 billion in debt that the company incurred in attempting to become the largest power generator in the U.S. An earlier post on Calpine’s troubles is here.
Calpine has lined up investment banks Credit Suisse First Boston and Deutsche Bank AG to provide up to $2 billion in debtor-in-possession financing at favorable rates, fueling creditor hopes that the company will be hold on to its profitable power plants in the better wholesale energy markets, such as California and Texas. Nevertheless, it is anticipated that the company’s plan will involve selling a substantial number of less profitable plants. The company has about $27 billion in assets and presently employs about 3,300 people.

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The Wall Street Journal’s Holman Jenkins‘ provocative column from a couple of weeks ago on the economics of the Toyota Prius hybrid automobile prompted a considerable amount of criticism from Prius owners, all of whom seem to be quite pleased with their decision to buy the vehicle. In response to that reaction, Mr. Jenkins pens this column ($) in today’s WSJ in which he defends his position that it does not make economic sense to overpay to save gasoline, but concedes that there are good reasons to buy a Prius:

Several Prius partisans emailed to say they purchased their cars not to save money but to save the earth, or at least make a statement about doing so. That’s a perfectly good reason to buy a car (as is wanting to meet girls). However, we doubt their Hollywood coreligionists would be so keen on solidarity if it meant driving around town in a Ford Fiesta.

After word leaked out over the past weekend that ConocoPhillips was in serious discussions to buy the fellow Houston-based Burlington Resources, the companies finalized on Monday an even richer deal than was initially reported.
ConocoPhillips ended up agreeing to increase the purchase price for Burlington from $30 billion to $35.6 billion, which computes to $90.69 per share of Burlington stock. That price is about a 10% premium on the $82.50 price for Burlington stock at the close of the market on Monday and an almost 20% premium on the price of Burlington stock from just this past Friday. ConocoPhillips will pay that amount in cash and stock, giving Burlington shareholders $46.50 in cash and .7214 share of ConocoPhillips common stock, which was equal to $44.19 of ConocoPhillips stock as of Monday’s market close. Current ConocoPhillips shareholders will own 83% of the company upon completion of the merger, which the companies expect to close during the first half of 2006.
ConocoPhillips will finance the acquisition mostly through debt, which has been its modus operandi during an acquistion spree under CEO James Mulva over the past several years. ConocoPhillips’s net debt will increase by about $18 billion to fund the acquisition, although Mr. Mulva noted yesterday that the company projects that net cash flow should retire 50% of that debt over the next three years.
As the market reverberates from the size of ConocoPhillips’ bet on the increasing value of Burlington’s unconventional natural gas assets, the logical question is “who’s next?” Burlington is one of several mid-tier exploration and production companies that have substantial North American gas assets and thus, those other companies could also be potential targets of bigger companies that elect to match ConocoPhillips’ bet of continued high natural gas prices. Among these other companies are EOG Resources Inc., XTO Energy Inc., Southwestern Energy Co., and Ultra Petroleum Corp., and even larger independents such as EnCana Corp., Devon Energy Corp., Pioneer Natural Resources, and The Woodlands-based Anadarko Petroleum Corp. could end up being targets of major E&P companies trying to lock up natural gas assets in a rising market.

ConocoPhillips is negotiating to purchase Burlington Resources Inc. in a huge $30 billion deal in a big bet that natural gas supplies will remain tight and higher prices the norm for the forseeable future. Burlington stock has been a hot item this year, trading at $40.40 a share in January and closing this past Friday at $76.09. ConocoPhillips shares closed Friday at $63.07 a share, giving it a hefty market cap of $87.5 billion. Although negotiations are still ongoing, a deal could be announced by the two Houston-based companies later this week.
Burlington Resources is one of the most successful companies developing natural-gas production from unconventional fields where the gas is embedded in rocky formations that make drilling difficult, expensive and dangerous. Inasmuch as natural gas is a relatively clean-burning fuel that heats a majority of U.S. homes and is widely used in industry, rising prices and improved technology are making unconventional natural gas fields much more attractive to energy companies that are increasingly desperate to increase reserves. About 80% of Burlington’s assets are related to North American natural gas fields.
The impending deal highlights conflicting views in the oil and gas industry as to whether such deals are good buys. On one hand, some traditional voices such as outgoing Exxon Mobil Corp. CEO Lee Raymond take the position that current high energy prices reflect a business cycle and that, as a result, producing and reserve assets are over-priced during such cycles. On the other hand, there is a growing faction in the oil and gas industry that views rising commodity prices as a fundamental shift in the market resulting from growing world-wide demand and slowing growth in supplies. Thus, that view contends that even expensive deals for companies with solid asset portfolios are a good bet, which was the rationale for Chevron Corp.’s $18 billion acquisition of Unocal Corp. earlier this year.

Inasmuch as big-time college football is to the National Football League as triple A minor league baseball is to Major League Baseball, a team’s branding rights can become an important asset. Along those lines, this interesting Austin American-Statesman article reports on the surge in royalty income that the University of Texas is enjoying from its athletic teams’ recent successes:

The Longhorns’ Rose Bowl victory over Michigan in January and the baseball team’s national title in June helped boost University of Texas merchandise royalties 29 percent to $4 million in the last fiscal year, . . . So far this year, [UT] has collected more royalties than any of the 200-plus schools affiliated with the Collegiate Licensing Co., which coordinates licensing for most major universities.
To license its trademarked logos, UT charges 8 percent of a product’s wholesale price. If a $20 Longhorns T-shirt has a wholesale price of $10, UT would get receive 80 cents. It might not sound like much, but consider that retail sales of collegiate merchandise topped $3 billion last year, according to Collegiate Licensing.
Add a football championship to that, and last year’s $4 million could end up looking like a paltry sum.

The article goes on to note that UT’s annual royalties from merchandise sales had fallen to a mere $600,000 as of the end of the John Mackovic era, which suggests that UT’s considerable investment in Mack Brown has been pretty darn savvy, after all.

You know it’s been a bad day at the office when a typo costs your company over 27 billion yen, which equates to a cool $225 million.
Here’s what happened. A Mizuho Securities trader (ex-trader?) wanted to sell one (1) share of J-Com Co. on Thursday morning at 610,000 yen. However, the trader typed the trade in to sell 610,000 shares at 1 yen. Although J-Com was debuting on the Tokyo Exchange with approximately 15,000 shares being offered, the Tokyo Exchange went ahead and processed the sale of J-Com, even though the sale was approximately 41 times the number of outstanding shares. The parent company of Mizuho Securities (Japan’s second largest bank) publicly stated that it would fully back the losses from the erroneous trade (how’s that for a cost of doing business?), which could wipe out Mizuho Securities’ first quarter profit of 28 billion yen (or $233 million). The Times Online article on the trade is here.
And lest we think that only anonymous traders make mistakes, this Andy Kessler/Wall Street Journal ($) piece reminds us that even the Oracle of Omaha is not infallible:

Shrines to Warren Buffett now outnumber Elvis altars. Which makes the Oracle of Omaha’s very public bet against the dollar going into this year even more painful for his copycats. Berkshire put on $21 billion in contracts with a value of $1.8 billion and cited “deep-rooted structural problems” and the need for changes in trade policy and dollar declines. With the dollar up 16% against the euro and yen, the investment was down $897 million as of October. So was his stock, until he was bailed out by three gals, Katrina, Rita and Wilma, who popped insurance rates. Can he repeat that little trick next year?

The Florida Marlins Baseball Club is making the rounds of potential relocation sites, and the first stop was in San Antonio. Other contenders for the club are Las Vegas, Portland, Oregon, and Charlotte, North Carolina. A move could come as soon as the 2008 baseball season, and such a move could also be impacted by the fact that the current MLB Labor Agreement allows the MLB owners to delete up to two clubs after the 2006 season, so stay tuned.
Interestingly, the potential move of the two-time World Series champion Marlins from Miami is being met with a collective yawn by South Floridians. Craig Depken explains why:

In the end, Miami-Dade County residents will survive just fine without baseball. Although their team won two World Series in their first ten years of existence, in comparison to the sights and sounds of Miami, WS rings are a yawner. In this sense, if the good folks of Miami don’t care one way or the other if the Marlins are in town, why should the rest of us?