After union battle, GM takes on the government

While GM Korea cleared a major hurdle after its union agreed to a last-minute deal, the company’s American headquarters still has high-stakes negotiations with the Korean government ahead of it.

GM President Dan Ammann, the company’s second-most-powerful executive, is scheduled to arrive in Korea early today.

The two sides are reportedly negotiating on several issues, including a guarantee that GM will stay in Korea for at least 10 years and the size of new investment in GM Korea from the U.S. headquarters and the Korea Development Bank, the automaker’s second-biggest stakeholder.

The government and GM hope to reach an agreement today before GM headquarters’ first-quarter earnings conference call later in the day. If the negotiations go well, the official agreement is expected to be signed next month when due diligence reports come out.

One of the most pressing issues for the Korean government is preventing the automaker from leaving the country.

The government’s concerns have been amplified because the KDB’s veto rights over GM selling its shares or capital in GM Korea, which it has had for the last 15 years, expired in October of last year. GM now has the right to sell off its stake in its local operation any time it wants to.

The Korean government is demanding that GM stay in Korea for the next ten years. A recent report by the KDB has estimated that GM Korea will be profitable in 2020, once the company normalizes its management situation.

The government is requesting veto rights for the KDB that would prevent GM from selling more than 20 percent of GM Korea’s assets, regardless of the KDB’s stake in the automaker.

The KDB currently has a 17 percent stake in GM Korea. Through a $2.7 billion debt-to-equity swap, the KDB’s stake is expected to shrink to 0.92 percent, whereas GM’s stake will skyrocket to 98.75 percent. The bank needs at least a 15-percent stake to veto any decisions made by GM. As a result, the Korean government and the KDB proposed a selective capital reduction on the debt-equity swap, which will reduce GM headquarters’ stake in GM Korea and also maintain the KDB’s stake at its current level.

GM is strongly opposed to the government’s plan. If not, the KDB will have to spend 590 billion won ($545 million) to keep its 17 percent stake. The Korean government has stepped down from demanding selective capital reduction in exchange for the preservation of the KDB’s veto right.

The two sides are also said to be discussing increasing the size of the new investment in GM Korea. While GM headquarters initially promised an investment of $2.8 billion, that amount is expected to increase, as the estimated cost will include severance payments for employees that chose to retire. GM reportedly asked the KDB to also increase their initial 500 billion won investment package by 100 billion or as much as 300 billion won.

Even if GM and the government reach an agreement, it doesn’t mean that the automaker has fully escaped its crisis.

GM Korea’s sales are suffering. In the first quarter of this year, sales have fallen 47.1 percent to 19,920 units. Especially in March, a month after the crisis started, sales halved compared to a year ago, plummeting 57.6 percent to 6,272 units.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]