GM Zombie Watch 20: IPO Or Bust
GM’s first post-bankruptcy financial data has arrived, underscoring in red ink the folly of the government “investment” in the shambling zombie once known as General Motors. Bankruptcy-driven improvements in cost structure have not prevented GM from turning a non-GAAP-certified loss since emerging from Chapter 11, and GM is already warning that 4th quarter results will be even less attractive. More importantly, beneath all of the interpretation of this latest batch of weak results, rests the biggest lie of all: GM will be paying back the taxpayers. GM has simply defined the terms of its debt as $6.7b, or about half the amount remaining in its $16b bankruptcy-present escrow account. The plan is to have the taxpayers pay off GM’s debt to the taxpayers, and collect the remaining $6b or so for operating cash. When called on the ruse, GM CEO Fritz Henderson has only one defense: Taxpayers will receive their just reward only when GM’s IPO relieves them of their 60 percent equity stake. But even with the goalposts moving up in hopes of a PR win, there’s little evidence that GM will come close to paying off their full bailout bill.
The timing of GM’s planned IPO is perhaps the major question in this equation. Henderson said over week ago that an IPO could be contemplated for the second half of 2010. Shortly after he made that statement, GM’s Chairman Ed Whitacre contradicted him, saying it was too early to even contemplate a GM IPO. The Government Accountability Office revealed that no plan for GM’s IPO has been formulated on the government end, citing a few of the difficulties facing a public offering. Stranger still, the GAO report indicated that the decision was neither Whitacre’s or Henderson’s, but that the call would be made by the Treasury Department. Of course, it also noted that the Treasury appears to be woefully understaffed and unready to prepare an IPO strategy for GM.
Since GM exited bankruptcy, persistent rumors have placed a possible IPO at around Henderson’s indicated target of Q2-Q3 2010. The GAO report backs up these assumptions, as its only hard date on GM’s path to private ownership is the expiration of its escrow account in July of next year. When that happens, GM will have declared its independence from obligations to taxpayers, and will receive the remainder of its escrow account, which could be as much as $7b at that point. A reinforced cash position, some good PR and a decent lineup of new models will have GM looking as IPO-worthy as it’s been in a while, and with both GM and the government anxious to disentangle themselves, IPO plans for that time frame seem more than justifiable.
Or, as Henderson put it today in an apparent rejection of Whitacre’s cautious approach, “there are a lot of factors suggesting [an IPO] should be ready to go in the second half [of 2010].” A mid-2010 IPO is looking especially attractive considering GM needs to fund its VEBA pension funds to the tune of $13b by 2013. CFO Ray Young has said that the automaker is looking into the possibility of beginning payments to the pension funds this year, but with payments on GM’s government loan going forward, there will only be enough cash to pay down just enough pension liability to make an IPO look more attractive. If that.
And the longer GM waits on an IPO, the greater the likelihood of a meltdown at Daewoo or Opel, both of which are being kept in the fold with taxpayer money and all the charm GM’s executives can muster. The specter of a sustained slide in US market share is another reason an IPO won’t wait past 2010. GM can only walk its current tightrope for so long before one of a number of IPO-blowing scenarios is going to erupt.
But for every motivation for GM to launch an IPO sometime next year, there are other pressures to wait. Though GM’s post-bankruptcy results show a cleaned-up balance sheet, EBIT is still negative, and North American Operations are still bleeding cash. And, as Henderson has admitted, the fourth quarter results for 2009 are only going to bring worse news. Paying the government back a billion bucks, plus the nearly $3b Delphi rescue have basically guaranteed that GM will burn cash through year’s end. And that’s before we have any idea of how the return of Red Toe Tag sales will affect incentive levels and earnings.
Nor is 2010 expected to be an ideal year for an automaker IPO. US SAAR is being widely projected to hold flat or climb slightly, with plausible estimates ranging from 10m to 10.7m. Even if GM does hold onto market share through 2010, those market levels will test GM’s 10.5m SAAR break-even pledge. If market share falls, GM will be losing money right into the summer. If that happens, GM could even hold off on final repayment of the $6.7b of outstanding government loans, adding to its pre-IPO debt levels. Incidentally, current debt levels are at $17b, not counting the $13b in VEBA obligations or the value of the Treasury’s 60 percent stake.
If there’s a final piece of this puzzle though, it’s the Volt: GM’s hail-mary will provide a speculative upside to GM’s value as long as it’s still just around the corner. An IPO in the midst of the Volt’s inevitably messy launch won’t attract anyone; an IPO just before the Volt launch will bring long-shot investors and problem gamblers out of the woodwork.With the rollout to selected customers beginning in Q4 2010, GM’s single product-related argument for an IPO seems to demand a 2010 offering.
Despite the apparent ongoing debate between Whitacre and Henderson, a mid-2010 IPO looks increasingly likely. GM will only be a year out of bankruptcy, and thusly blessed with ample excuses. A much-hyped new product will be right around the corner, tantalizing investors. Opel and Daewoo can likely be held in check until then. The last bump of federal cash will become unrestricted. Best of all, GM will have been trumpeting its alleged pay-back of government loans (conveniently leaving out the fact that taxpayers are merely repaying themselves) for months, giving it a fresh head of (misleading) PR steam. The only thing missing from the equation: the $66b-and -change market valuation that GM would need to actually pay back taxpayers.
But for all the pressure being exerted on GM right now, the element most lacking is pressure to fully repay the entire $50b-and-change that GM received from the taxpayers. GM has to prove some kind of short-term financial improvement (which its bankruptcy-improved cost structure already largely has), some short-term sales results (which it did in October, although only with massive incentives) and some future upside to attract at least some investment. The government increasingly sees its stake in GM as a political liability, and will rid itself of its stake before the 2012 election season at nearly any cost. All of which will add up to somewhere between $25b and $40b in lost taxpayer money. GM’s future success in the market depends on being able to hide that cost, creating a new cultural cancer (not to mention a potential market-share cancer) in the resuscitated patient. Without a clean break from its bailout baby past, GM seems doomed to wind up on the table again.
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