A trust fund set up by the United Auto Workers union is hoping to raise at least $1.3 billion to help pay retiree health care costs by selling rights to an 11 percent ownership stake in Ford Motor Co.
The trust will auction warrants to buy 362 million shares, which were issued in December 2009, starting at 8 a.m. Tuesday. The automaker and union agreed to set up the trust to help Ford remove retiree health care costs from its books while it was in financial trouble in 2007.
In January, the trust began paying health care costs for about 200,000 Ford blue-collar retirees and their spouses nationwide, and Ford said it is saving the company roughly $500 million per year.
The trust set a minimum price for each warrant at $3.50. Each warrant gives the holder the right to buy a Ford share at $9.20. At the minimum price, the trust would get $1.3 billion, $100 million more than the value Ford placed on the warrants in December.
Shelly Lombard, credit analyst at the New York bond research firm GimmeCredit, said the trust is wise to sell the warrants now, since Ford's stock has been on the rise.
"The economy's improving and Toyota's on the ropes, so the sense is that things will only go up from here," she said. "But having said that, it just makes perfect financial sense to take some money off the table. You never know what the market's going to do."
In the past 16 months, Ford shares have grown more than 10 times in value as the company avoided bankruptcy protection and government aid, won accolades for its car quality and reported a full-year profit for 2009.
The automaker's shares closed as low as $1.26 on Nov. 19, 2008, the lowest price in more than 27 years. But on March 18 they hit an intraday price of $14.54, the highest level since January of 2005.
The combined $12.70 that a buyer would pay for both the warrant and a share of Ford stock is 8 percent below Ford's closing stock price on Friday of $13.86 a share.
Ford shares fell 42 cents, or 3 percent, to $13.44 in Monday afternoon trading.
Ford and the UAW would not comment on the decision to sell the warrants. But the trust is legally obligated to diversify its investments to guard against another auto industry downturn.
Ford valued the UAW trust's warrants at $1.2 billion in its annual report filed in February, but because of the stock price increase, the trust is likely to reap more than that. To satisfy the warrants, Ford will issue stock to the buyers based on the difference between $9.20 per share and the share price at the time the warrants are exercised.
The UAW trust, called a voluntary employees beneficiary association, has received $2.5 billion in cash from Ford. It already had $3.5 billion mainly from previous trusts set up by the company.
Ford still owes the trust two notes that were worth a total of $7 billion as of Dec. 31, and the company can pay up to half of that obligation in stock.
In exchange for all the payments, Ford unloaded a retiree health care liability from its books valued at $13.6 billion over the lives of all 200,000 retirees and spouses.
Ford's trust is far healthier than similar ones the union negotiated with General Motors Co. and Chrysler Group LLC. The GM and Chrysler trusts are dependent on the two automakers selling stock to the public.
GM's trust covers around 700,000 retirees and spouses, while Chrysler's covers 120,000.
Ford, General Motors Co. and Chrysler Group LLC all set up retiree health care trusts as part of their 2007 labor negotiations with the union. The automakers wanted the trusts so that they could remove billions in retiree health care costs from their books, while the UAW supported them as a way to protect retirees' health care costs even if the automakers filed for bankruptcy or were bought by other companies.
As it turned out, GM and Chrysler did file for bankruptcy protection last year, and Chrysler is now run by Italian automaker Fiat Group SpA. The UAW trust fund received a 17.5 percent ownership stake in GM and a 55 percent stake in Chrysler as part of the companies' government-led emergence from bankruptcy protection.
The U.S. government owns 61 percent of GM and roughly 10 percent of Chrysler, which it got in exchange for roughly $67 billion spent to keep the two automakers afloat.
It's unclear just how much the companies will get for their stock, which is largely dependent on sales and their financial performance. GM hopes to sell stock late this year, while Chrysler has not put a date on its sale.
Ford also said Monday it will pay $3 billion to a revolving credit line that is due in 2013. The credit line will have a $3.7 billion balance after the payment, which will be made April 6.
Ford continues to be saddled with high debt. After the $3 billion payment, the company will still owe about $32 billion overall. Chief Financial Officer Lewis Booth said in January that the company has "an uncompetitive balance sheet" and will work on cutting debt this year, but he wouldn't say what steps it will take.
The Dearborn, Michigan, automaker mortgaged all its assets in 2006 and 2007 to secure a $23.4 billion credit line to cover its restructuring costs and losses. The money enabled Ford to avoid taking government aid and entering bankruptcy protection like its crosstown rivals, General Motors Co. and Chrysler Group LLC.
In January the company posted a $2.7 billion annual profit for 2009 and said it expects to stay in the black in 2010. It was the automaker's first annual profit in four years.