Ed does things that are bolder and bigger rather than small and timid. All things being equal, Ed would like it bigger versus small. But all things aren’t equal. He needs to get the government the best value for its stake, too.
Former AT&T exec James Kahan tells BusinessWeek what kind of IPO GM’s Chairman would prefer. Unfortunately for “Big Ed,” that’s not up to him. GM’s value must be determined by the market, and due to political pressure on the government to end its ownership of GM and Chrysler, it will have to happen as soon as possible. A fourth-quarter IPO with “about half of the government stake [being sold] to the 20 top institutional investors” is in the cards. So we know the government won’t get out of GM entirely in the IPO… but how much will the market give the Treasury for half of its 61 percent stake?
The first question then, is whether or not big investors are even interested. On this point, the answers from Wall Street types betray strong underlying ambivalence:
“Can the market absorb a multibillion deal of General Motors? Yeah, in a heartbeat,” said William Smith, president of Smith Asset Management in New York, who used to own shares of GM. “It’s General Motors. The question then becomes is it valuable and is it worth buying on the IPO?”
I’d almost feel a patriotic responsibility to look at it,” said Jim Porter, founder of Hinsdale, Illinois-based New Century Capital Management LLC. “It’s certainly more streamlined and a lot more interesting than it ever has been in the past.”
There’ll be such a close watch on this IPO,” said Steven M. Rogé, a Bohemia, New York-based manager at R.W. Rogé & Co., which oversees $200 million. “It won’t just be financial, it’ll be political. It might even be more political than financial.
If you can find a more ambivalent group of investors, give them your money. After all, there’s still plenty of room for skepticism about the medium-term fate of General Motors. GM is operating for break-even at its current market share in an 11m unit market, according to CFO Chris Liddell. But the sales just aren’t there. Even GM’s own bankruptcy advisor, Alix Partners, is pessimistic. The WSJ [sub] reports:
In the first five months of the year, the annualized pace of retail auto sales peaked at 9.5 million cars and trucks in March, when consumer purchases were spurred by heavy incentives offered by Toyota Motor Corp., according to AlixPartners’ new auto-industry study. The retail-sales pace in May was just 8.9 million vehicles.
And with 38 percent of GM’s sales coming from fleet buys, even an 11.6 overall (fleet and retail) SAAR isn’t enough to keep GM on-track. As Alix Parnters’ John Hoffecker puts it:
From a profit standpoint, the industry is still in good shape, but we need the broader economy to kick in before it’s a full green light.
And GM wants to see that green light before it puts itself on the market. After all, 32 IPOs have already been pulled from the market in this year alone. And estimates of GM’s IPO value still vary wildly. One method of valuation is the “Motors Liquidation bond” technique, popular among bailout defenders and optimists in general. BW reports:
GM’s equity is worth $70 billion, according to a May 20 report by Eric Selle, a JPMorgan debt analyst who projects a return of 47 cents on the dollar for holders of bonds issued by GM’s predecessor, General Motors Corp., that will be converted to stock and warrants in new GM. At June 11 bond prices, GM’s implied equity value is about $45 billion.
The 8.375 percent notes due in 2033 declined 1.5 cents to 30.25 cents on the dollar June 11 in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. That represents a 22 percent decline from the April 30 peak of 38.81 cents
So that’s what the speculators think. According to Independent International Investment Research Plc, however, GM’s IPO will likely be worth “as much as $12 billion.” Is that enough of a spread for you? Where do you think GM’s value will shake out at? Will it matter if GM is valued at less than the amount of the federal bailout?