By on June 14, 2010

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?

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8 Comments on “How Big Will GM’s IPO Be?...”


  • avatar

    Ewanick’s success or failure will be a large determinent in how investors value GM. selling more cars solves many of the General’s troubles rather quickly.

  • avatar
    Tommy Boy

    It’ll come down to how much of a loss institutional investors will be willing to pass along to their clients so that the (excess) proceeds can be “redistributed” to the government.

    You just know that the Obama administration will threaten institutional investors, TARP bailout recipients, etc. — it’s the Chicago and Marxist way (and Obama resides in both worlds). They threatened and strong-armed the bondholders before the bankruptcy — do you think that somehow now they’ll behave morally and legally?

    So it’ll be political, and the institutions will calculate the cost-benefit ratio of how much they can please Obama and the Democrats (by then wielding a new Wall Street regulatory scheme over their heads) vs. how much loss they can absorb and pass-along to their investor clients and stockholders, without getting nailed in a class-action suit (or RICO suit) for conspiring to make bad investments and breach of their fiduciary duties.

    • 0 avatar
      tparkit

      Quite so. The only true words in the articles are:

      “It won’t just be financial, it’ll be political. It might even be more political than financial.”

      The notion that “the market” will set the value according to some objective valuation method is absurd.

  • avatar
    L'avventura

    There have been a discussion on who is doing the underwriting, and the general consensus is that it won’t be over $15B.

    http://online.wsj.com/article/SB10001424052748703509404575300430351563768.html?mod=WSJ_hpp_sections_business
    http://www.foxbusiness.com/story/markets/industries/finance/jpmorgan-bofa-split-gm-ipo-underwriting/

    A couple days ago the WSJ said it will be around $10 Billion:
    http://online.wsj.com/article/SB10001424052748703509404575300430351563768.html?mod=WSJ_Deals_LeadStory

    Even with that it will be one of the biggest IPOs in recent history. The White House will likely want to avoid making the IPO too large because they don’t want to flood the market with too many shares, which would drive the price down- they want the initial shares to be priced as high as possible to claim they justifiably spent the taxpayer money wisely. Headlines are just as important as the money in this case.

    One thing that will play a role is that investors will know that more shares of GM will be hitting the market sooner rather then later, especially as VEBA, and the US/Canadian governments unload their shares over the short/medium-term. There is an obvious pressure for the US Government to quickly unload its share, and to rid the perception of ‘Government Motors’ as quickly as possible as it is a political liability. For this reason, there is little incentive for investors to scramble to get shares in the initial IPO, being that more shares are inevitably going to hit the market.

    But the White House is likely thinking of maximizing the political impact of the IPO. They would want it to be large enough to claim its real, and they want to have it valued at more then what the government will claim they gave as a bailout so that they can say its a victory.

    Due to these non-economic variables, this will be a very interesting IPO to watch as it unfolds…

  • avatar
    John Horner

    “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.””

    Apples and oranges. There is a difference between the valuation of the shares sold in an IPO and the total valuation of the company. A GM IPO will certainly not involve 100% of the company. IPOs typically are for a slice of the total company equity pie. Follow on offerings, shelf registrations and releases of lock up agreements are but some of the ways equity not included in the Initial Public Offering may eventually find its way on to the market.

    It is interesting that with the many portions of Business Week’s article quoted in the blog post above, this one was left out:

    “‘GM’s earnings potential is excellent because it finally has a healthy North American unit and can focus its marketing efforts on just four brands instead of eight,’ David Whiston, an analyst at Morningstar Investment Services Inc. in Chicago, said in a June 7 report.”

  • avatar
    mythicalprogrammer

    “How Big Will GM’s IPO Be?”

    Do we really have to speculate on this? Haha. Whatever it will be it will be. Damn, business people always trying to make a buck out of everything. Sorry, but speculators are the ones that kills it for those real investors with business fundamentals out there.

  • avatar

    GM can talk the walk and show the proof on paper of sales but If I were an investor I would sit on my cash for several reasons. One what kind of quality are they producing in their economy line. Two, what will the economy be like down the road in three years.
    Just because their sales outrank other car mfg it doesn’t mean the consumer made a wise choice in buying a vehicle that they can afford to maintain. Example GMC Arcadia with 18″ tires avg cost per tire $200 and the owners manual states a front end alignment every 6k miles.
    Now you can tell me this is irrelevant or I’m comparing apples to oranges but I can say I’ve experience a similar situation. My new boss that merged with my other boss, tried to sell to him how much his mobile shop trucks made on paper. However when the cost of fuel went up along with customers abusing the purpose of a shop truck for a delivery truck, we had to cease this service. In addition my new boss has made bad decisions on purchasing high performance parts as a stocking item when they should of been ordered as needed basis.

  • avatar
    porschespeed

    I’m just getting ready to wet my pants laughing at the chumps who buy this POS IPO.

    ‘Tis worth less than nothing to anyone with their cranium out of their rectum who is not an ‘investment bank’.

    GM has no product, no personnel, no value.

    (Though I will make money by shorting the cretins…)


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