The Detroit News reports that the Treasury Department has hired Lazard Frères & Co. as an advisor to GM’s forthcoming IPO sale. And with news of the hiring comes confirmation that GM’s IPO really is coming soon: the investment bank will receive half a million dollars, according to the DetN, but that amount will drop to $250,000 if the IPO isn’t completed within one year. If you’re one of the GM boosters who believes that an IPO will repay all or most of the government’s investment in GM, it’s time to start saving those pennies. You have less than a year now to put your money where your mouth has been.
If you are a GM optimist, you are not alone. Last Friday the Treasury revised its estimated loss on the $85b auto bailout to $24.6b from $28.2b, on the strength of GM’s profitable first quarter, and overall improvement by the domestic automakers. The Congressional Budget Office had previously pegged auto bailout losses at $30b. Total losses on the TARP program that funded the auto sector bailout have also been revised downwards to $105.4b, driven largely by improved valuation outlooks for Citigroup stock.
Lazard’s advising of the Treasury Department on GM’s IPO will include
valuing the government’s assets, offering advice on potential transactions and analyzing alternatives for disposing of the assets
This will help Treasury negotiate one of the toughest decisions in the entire auto bailout: how to time its sale of GM equity. Previous reports have indicated that the Treasury will not try to time the sale to maximize taxpayer value, but will instead try to dump the stock as quickly as possible. Certainly, the political environment seems to favor dumping stock at a loss as much as it does recapturing every last bit of value in GM’s equity.
Doubtless Lazard will try to navigate a compromise between an expeditious public offering and making the most out of Treasury’s investment, but with the possibility of a European-led “double-dip” economic downturn looming, an offering in the next 12 months could find itself flying into the teeth of a jittery market. Helping the case for a rapid GM IPO will be the $10b+ DOE ATVM loans which will be hitting GM’s books within the next several months, as well as the launch of key new products this year, like the Cruze and the Volt.
Perhaps the most important questions surrounding the GM IPO have to do with the structure of the public offering. Will Treasury put all of its 61 percent stake of GM up for sale all at once? And if so, what happens to the UAW’s VEBA fund, which owns another 17.5 percent stake in GM? With nearly 80 percent of GM’s equity held by a cash-strapped union benefit fund and a Treasury department with political motivations for getting out fast, there’s going to be a lot of GM equity for the market to absorb. And, larger economic worries aside, the automotive sector has been a volatile place to park money over the last year.
The challenges are clear. What’s less clear is what the VEBA fund and Treasury are hoping to get out of a GM IPO, and what kind of impact an IPO might have on GM’s performance. IPOs are mysterious, often-irrational events. Here’s hoping this one breaks out big and allows GM to break free of government ownership. Languishing amidst “Government Motors” criticism and cleverly-spun “Payback” ads clearly isn’t doing The General or its taxpayer investors any favors. For better or for worse, it’s time to put this chapter behind us.