General Motors in an initial public offering (IPO) this month will price its shares at a level that could regenerate investor interest, and even throw off generous returns over time.
At least that's the hope of the U.S. government, which is likely to see its taxpayer-owned stake fall to less than the symbolically important 50% level when it sells approximately $7 billion of its shares in the IPO.
GM, 61% owned by the U.S. Treasury Department, will offer 365 million shares at $26 to $29 each, people familiar with the matter told The Wall Street Journal. The automaker also will offer $2 billion to $3 billion of preferred shares that later will become common stock, the people said.
Projections by GM say the company could have a stock-market value of $50 billion at the start of trading – about the same as Ford Motor Co (NYSE: F), which last week reported net profits of $1.69 billion for the third quarter.
GM will issue its stock to the public in an effort to pay back the $49.5 billion of taxpayer funds it received last year. The IPO would raise about $10.6 billion.
The Treasury intends to sell its remaining shares at higher prices down the road, settling for less than the $12 billion to $16 billion Detroit-based GM and its investment banks had projected earlier. The actual price of the stock to be sold in the IPO would be set about Nov. 17, and the sale would take place the following day.
But for the U.S. government to break even by selling of the rest of its stake, the share price would need to rise more than 60% from its initial level, to about $50.
"This makes sense," George Magliano, a senior economist for IHS Automotive (NYSE: IHS) who is based in New York, told Bloomberg News in an interview yesterday (Tuesday). "They need to protect the price of the offering. The IPO was never intended to buy out all of the government and union stakes in one fell swoop. It's got to be done over time, and you need to get the right price."
The plan calls for the Treasury to offload $7 billion of its shares, slicing its 61% stake to about 35% – lower than many observers expected. The United Auto Workers trust, which pays for retiree health care, would sell $2 billion of its shares, while Canada and Ontario would sell around $1 billion of their shares, The Journal reported.
The plan also includes a stock split that will triple the number of available GM common shares to 1.5 billion. Outstanding warrants will bring total shares available to roughly 1.8 billion.
GM Chief Executive Officer Dan Akerson, a former Carlyle Group managing director, said he intends to reenergize the company by improving quality and streamlining lines of communication at the world's second-largest automaker. Akerson took over for Ed Whitacre as CEO in September and will succeed him as chairman at the end of the year.
"I don't think any investor group has infinite patience, and I'm sure that the taxpayers of America would like to see a return on their investment," Akerson told reporters on Sept. 16. "That's one of the goals that we have."
GM recorded net income of $1.54 billion for the second-quarter on Aug. 12 and chalked up a profit of $1.07 billion in the first three months of the year. Revenue in the second quarter increased 44% from a year earlier to $33.2 billion
GM returned $2.1 billion to the U.S. Treasury last week, bringing the total amount it has repaid through loan payments, interest payments and dividends to $9.5 billion, the Treasury said.
The offering comes after the Standard & Poor's 500 Index climbed 13% in September and October, the best performance for those two months since 1998, according to data compiled by Bloomberg. A total of 21 companies sold shares through IPOs on U.S. exchanges last month, the most since 22 IPOs in December 2007, Bloomberg reported.
GM is set to launch a "road show" to pitch the IPO to prospective investors today (Wednesday), the day after it files the details of the stock offering with the Securities and Exchange Commission
"The market is right and they're going to merchandise this globally," Joe Phillippi, principal of AutoTrends Inc., a consulting firm in Short Hills, New Jersey told Bloomberg. "I think they have a good shot of getting this done."
Investment bankers for GM met with sovereign wealth funds and private investors in the Middle East and Asia last month to gauge interest in the offering, two people familiar with the meetings told Bloomberg. As many as five of the funds are likely to purchase as much as $2 billion of stock in the offering, one of the people said.
At least one prominent analyst believes the GM IPO offers good value for small investors as well.
"This GM deal is going to excite a lot of people and maybe even entice them back to the casino," Jim Cramer wrote in yesterday's issue of the The Street.
"That's right, I believe the deal is going to be a smashing success. It is not just pricing that matters, although I believe the government is going to throw it to the good guys, meaning the buyers. There's also actually a strong investment case out of China," Cramer wrote, referring to GM's growing share of the world' largest auto market.
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