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Awash in Common Stock, Ford Motor Issues More Shares to UAW-Run Healthcare Trust

Ford Motor (F) dodged another financial bullet after the Labor Department didn't voice objection to the company's proposed plan to issue stock in lieu of cash for payment of up to half of the $13.2 billion it owes to a retiree health care fund, Voluntary Employee Beneficiary Association (VEBA). This employee benefits trust arrangement with the United Auto Workers (UAW), however, is nothing more than "sleight of hand" by the automaker -- manufacturing money out of nothing.

Ceding control over their employee health care and retiree benefits to the UAW is expected to improve Ford's cash flow by almost $1 billion a year while reducing the company's health care costs by approximately $2 billion annually. "You pays your money and you takes your choice," wrote Mark Twain (in The Adventures of Huckleberry Finn). Implementation of the VEBA agreement with the UAW, however, will increase Ford's debt on its books by $7 billion to $8 billion and increase interest expense by about $700 million in 2010, chief financial officer Lewis Booth said on the company's third-quarter 2009 conference call to analysts.

Separating itself from Detroit rivals General Motors and Chrysler, the company chose not to seek government assistance or file for bankruptcy. The manufacturer of the legendary Model T has managed to stand alone on its own four wheels, but at significant cost. In late 2006, Ford raised $23.5 billion in cash reserves by mortgaging most of its automotive assets. At September 30, total adjusted debt stood at $79.7 billion -- compared to negative equity of approximately $7.3 billion.

This VEBA-UAW deal eerily resembles other debt reduction initiatives undertaken by Ford -- improving liquidity and rinsing its balance sheet clean of debt, in part, by issuing new stock and swapping debt for stock. For example, during the first-half 2009 the company exchanged $4.3 billion in convertible debt for 467.9 million shares of common stock.

In the last seven quarters, common stock outstanding rose by some 65 percent to 3.24 billion, which does not include almost 933.6 million in additional shares reserved for issuance under executive bonus plans, VEBA contributions, and debentures/notes with convertible options; yet, in the same period of time stockholder equity plummeted from $5.63 billion to negative $7.3 billion, as the company burned through piles of cash and quarterly losses to survive the dark days of the Great Recession.

The VEBA trust would create significant dilution -- though not to the descendents of founder Henry Ford, who own 40 percent of total voting shares through prior issuance of protected Class B shares. In accordance with the original 2007 VEBA agreement -- with the exception of the first three contributions -- the number of shares transferred will be determined on the average trading price of Ford stock during the 30-day period prior to the scheduled contribution. Common stock outstanding also does not include a warrant to acquire 362.4 million shares issued to the VEBA (at an exercise price of $9.20 a share).

To its credit, Ford has worked hard to cut structural costs to be more in line with current vehicle demand, including reductions in payroll, manufacturing plants, and advertising & sales promotions. Through the first nine months, Ford has achieved $4.6 billion in savings, exceeding its full-year 2009 target of $4 billion. In 2008, the automotive sector reported cost savings of $4.4 billion, according to regulatory filings with the SEC.

Chief executive Alan Mulally said on the earnings call that the company expects to be solidly profitable in 2011 and plans to accelerate debt repayments as its financial condition continues to improve.

In my opinion, going forward the automaker's operating results will rise and set with the pace of U.S. and European economic activities, as Ford derived 76.4 percent of recent third-quarter sales from its North American and Ford Europe automotive segments. A muted industry recovery in both theatres would likely leave vested stakeholders -- included union members -- wondering where future cash flow is coming from -- if not from even more share issuance?

Image source: Scripophily Trader

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