By on July 5, 2010

Despite having more cash than debt for the first time in decades, GM is going back to Wall Street in search of fresh debt. Over the weekend, The General has been in talks with several banks to secure a $5b revolving line of credit to shore up its liquidity position ahead of an IPO that’s rumored to take place in August. At $5b, GM’s desired line of credit would essentially replace the $5.8b the automaker has repaid to the Treasury, and will help it deal with a number of pressing cash needs to maintain its shaky global empire. But with so many pressing uses for the cash, and political pressure mounting for a rapid IPO, can GM deal with its issues and take on more debt and be worth what the government wants it to be worth? Troublingly, the answers to these questions are not to be found on GM’s balance sheet.

GM’s money-losing European Opel division has lost over a billion dollars since the firm emerged from bankruptcy, and will require nearly $5b in restructuring funds, to be paid by GM since state aid from Germany fell through. On the other side of the Eurasian continent, another crisis is racking GM’s other most important overseas division, GM-Daewoo. Tradingmarkets reports that GM-DAT’s creditors (including the Korean Development Bank) have agreed to roll over some $900m in debt. And not just because they’re sweet people either. The payback was postponed on the condition that GM

transfer key auto technologies to its South Korean unit and dispatch an official to take charge of the subsidiary’s finances to keep it afloat

Needless to say, this $6b overseas money pit is a nasty bit of business given GM’s desire to hold an IPO this summer. Which is where the $5b credit line comes in. Unfortunately, GM isn’t having an easier time getting money from Wall Street than it did trying to get money from the German government.

In fact, GM is even keeping its options open to include asset sales, according to the FT. Possibly up for sale: GM’s stakes in Delphi and GMAC (now known as Ally Financial). But with nobody breaking down doors to get at either of those two struggling firms, credit is GM’s first line of defense against looming cash problems. After all, as IHS Global Insight’s Rebecca Lindland tells the Freep

Alan Mulally taught the industry, you can never borrow too much cash

And here we were thinking that the bailout proved that you could take on such crushing debt loads that the government has to rescue you. Speaking of which, Reuters reports that fellow TARP recipients, Bank of America, Citigroup, JPMorgan Chase and Morgan Stanley, have agreed to each provide half a billion dollars to the GM revolving credit cause. The other $3b? No word on that front yet… and that’s not exactly great news when you’re about to ask the market to out a value on your stock.

GM says it has two weeks to line up the remaining $3b in credit, and sources tell Reuters that

GM is more likely to cut the valuation on the IPO than delay it and is looking for a broad investor base

And at this point the size and valuation of GM’s IPO is the crucial question. Treasury is staying cagey about just how much of its 61 percent stake in GM it will float, but 20-24 percent is being mentioned as a possibility. That would make sense, as it would be just barely enough to take the Treasury’s below the crucial 51 percent mark, theoretically freeing GM from the stigma of majority government ownership.

Reuters says that this 12.2-14.6 percent stake could be worth $10b-$12b, numbers that would give GM an overall value of around $80b. With GM planning to sell $3b worth of convertible securities, the Canadian and Ontario governments looking to move 20 percent of its 11.7 stake, and the UAW moving an undisclosed amount of its stake, Reuters reckons GM’s IPO could reach $15b-$20b. That would make it one of the biggest IPOs in American history.

If everything goes to plan, anyway. But here’s a problem: the $80b-ish market cap that this hypothetical IPO supports, is over twice the market cap of automakers like Ford Motor Company, Nissan (which stands on the brink of an EV breakthrough) and Volkswagen. Though smaller than Toyota’s $107b-ish market cap, this valuation would make GM one of the most valuable automakers in the world, despite modest post-bankruptcy operating profit, looming overseas division issues and $27b in pension shortfalls. That last issue alone could cost the company as much as $12b by 2014.

No wonder then, that GM’s IPO hypsters are using Ebitdapo, or earnings before interest, tax, depreciation, amortization and postretirement benefits to tout its financial health. But pretending like those pension obligations don’t exist doesn’t make it so. Is GM in better shape than it once was? Undoubtedly. Is it one of the most valuable automakers in the world? Almost certainly not. The fact that GM is determined not to delay its IPO is a product of political needs, not market-related concerns. If a mid-term election weren’t looming, the Treasury would wait to let GM deal with its numerous remaining issues before releasing the automaker into the wild. But it can’t have its cake and eat it to: if GM’s IPO launches this August, it will do so with so many potential cash sucks hanging over it, that an $80b valuation isn’t likely to be the result.

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15 Comments on “GM’s IPO: Faster, Harder And Less Satisfying...”


  • avatar
    buzz phillips

    Maybe Obama will provide GM with another Washington check! Poor, poor
    taxpayers!

  • avatar
    daga

    EBITDAPO? I’ve heard of EBITDAR being used in these cases, but that one seems odd. How about EBITDAHF? (pro forma EBITDA ex Hyundai and Ford market share gains)

  • avatar
    Tommy Boy

    Look behind the curtain (and the union label) …

    I wonder what political pressure is being applied — to GM to IPO and (TARP) banks / pension funds to buy — so that Obama can claim victory for the UAW bailout, err, I mean automaker bailout, prior to the November midterm elections?

  • avatar
    Tommy Boy

    Another thought — why would anyone in their right mind invest in a UAW occupied company, particularly since the new UAW boss King has very vehemently stated that he intends to go back to business as usual (and so eventually bring GM / Ford / Chrysler to their knees)?

    Perhaps as a short trading opportunity, or for TARP (and similar firms) to appease their government masters, but I can’t see anyone in their right mind investing in GM / Ford or Chrysler so long as the UAW is on the premises, particularly after the way the Obama administration stiffed the bondholders in order to reward the UAW.

  • avatar
    Robert Schwartz

    If the stock market keeps going down, as it has for the last 2 months, this is going to get truly ugly.

  • avatar
    mdwheary

    Somewhere, P.T. Barnum must be laughing his ass off.

  • avatar
    educatordan

    “GM is even keeping its options open to include asset sales, according to the FT.”

    “Asset sales?” Buick sold to Chinese JV partner?

  • avatar
    Dimwit

    I can see this going out the door at around $5, no more. The market ain’t there. This isn’t Ford and with a weak market the large players will be sitting on the sidelines. I’m surprised that Buffett hasn’t had something to say about all this. Probably everyone is scared to ask.

  • avatar

    another excellent article Ed. as much as I miss Robert’s insight and wit, TTAC remains the premier auto website for in depth analysis and relevant information.

  • avatar
    Dave M.

    I don’t believe Hyundai’s plant is unionized. Which makes them the most attractive domestic automaker I can think of.

  • avatar
    ihatetrees

    Is a pre-election IPO really that necessary? The administration is looking for something to crow about, but this has the potential to blow up. The Dems are going to take a hit during the mid-terms – I don’t see how an average to poor IPO plays to their advantage.

    Waiting 9-12 months for a (admittedly potential) sales rebound seems better.

  • avatar

    I miss Robert too. Oh wait. Seriously, great article Ed. I reckon GM will withdraw this IPO. The economy is heading for a double dip recession. Car sales are about to hit their seasonal slump. There’s about as much appetite for a mega-IPO as there is for The Dead Kennedys at the Met. And as we learned during the Death Watch, cash is king. You’ve already spoken to that point. And my mother taught me never to speak ill of the dead (fat lot of good that did me).

    I reckon it ain’t gonna happen before the mid-terms. And certainly not afterwards. GM will probably sell something to someone and call it an IPO, but it will be a pro forma deal, with some tasty under-the-table stuff for friends of the U.S. Treasury. You see that fork that got stuck into GM before they reached into your pocket? It’s still there.

  • avatar
    Invisible

    Will the tax payers be forced to bail out the “NEW” GM after it goes public? Really not much is new. GM still relies on heavy incentives to move metal. Lots of fleet sales. UAW draining the life out of the company. Bigger problem now is, Obammy gave a huge chunk of GM to the Detroit Mafia.

    I predict more fleecing of the tax payers to keep the DEMS big campaign contributors happy.


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