The hottest IPO of 2010: GM?

The hottest IPO of 2010: GM?

Thanks largely to Uncle Sam’s generosity, the automaker has an excellent balance sheet and is on the road to competitiveness. Is it time for investors to hop on board?  

By Barron’s

 

The hottest initial public offering of 2010 could be General Motors. That’s right, GM.

The automaker, long synonymous with bloat and mismanagement, has undergone an impressive turnaround since emerging from bankruptcy last year. GM still is no Honda Motor  or BMW , but it’s probably in its best shape since its heyday in the 1960s. GM operated at a narrow loss in the third quarter, and fourth-quarter results, due later this month, could show an operating profit.

Wall Street is excited because a competitive GM could be very profitable if the auto market turns up next year. Some of the good news: GM’s U.S. market share is up; its costs are down; its vehicle incentives and inventories have declined; and its resale values have risen.

 

GM may go public in the second half of this year, and its stock-market value could top $50 billion, more than Ford Motor’s (F, news, msgs) $42 billion or Daimler’s (DAI, news, msgs) $44 billion. Toyota Motor (TM, news, msgs) tops the industry with a market value of $118 billion.

JPMorgan credit analyst Eric Selle wrote in a client presentation last week that a public GM could have a market value of $63 billion. That could be aggressive, but $50 billion is a real possibility. After its near-death experience, GM finally has an excellent balance sheet, with $42 billion in cash at the end of the third quarter, against $29 billion in debt and preferred stock. This admittedly reflects Uncle Sam’s largess in pumping $50 billion into GM in late 2008 and 2009, plus obligations the automaker shed through its restructuring.

After seeking bankruptcy protection in June, GM emerged in July as a private company shorn of much of its debt and with four equity owners. The federal government turned most of a $50 billion loan into a 60.8% stake.

The Canadian government received an 11.7% stake for putting $9 billion into GM, which has several assembly plants north of the border.

The United Auto Workers union got a 17.5% interest for forgoing a $20 billion health care claim against GM. The holders of $27 billion of GM’s public debt, as well as other creditors, got a 10% equity stake, plus warrants for an additional 15% of the company.

A $50 billion equity value for GM would be good news for U.S. taxpayers; Washington could recoup a big chunk of its investment. The Treasury’s 60% holding would be worth $26 billion. In addition, Uncle Sam holds $9 billion of GM debt and preferred shares.

 
 

CEO Edward Whitacre has said that GM will repay the debt by June. The UAW is in the best position because it may get back 80% of its health care claims via the GM equity stake, plus $9 billion of debt and preferred stock.

 

Even if the debt rallies, bondholders will fare the worst, reflecting the restructuring of GM by the Obama administration that favored the union over bondholders despite their similar legal claims. The union is also apt to do better than taxpayers, based on its sweet deal.

A 2010 IPO isn’t a sure thing. Whitacre has been noncommittal about a date, but has said he’d like to see a public offering as soon as possible. The White House is eager to begin exiting its investment in what some pundits call Government Motors.

Investors can play GM via some $27 billion (face value) of debt of the old GM, which trades around 30 cents on the dollar and is due to be exchanged for a mix of stock and warrants in the new GM. These are no longer conventional bonds that pay interest and principal; they simply will give holders equity in the company.

Many ways to play a revival

The original bondholders have been hammered — the debt traded at 95 cents on the dollar as recently as 2007 — but prices have tripled from about 10 cents since before the bankruptcy filing as Wall Street has warmed to the company’s story.

 

The debt carries obvious risk, given the uncertain recovery value. Many institutional investors avoid such complex distress-debt situations. There are many other ways to play a revival in global auto markets that are much simpler than buying General Motors debt, including investing in shares of Ford, Daimler or Toyota, whose stock is down 12% this year amid concern about the financial impact of its highly publicized recalls. Ford trades for nine times projected 2010 profits. Daimler, whose shares are off 19% this year, offers a diversified international play on cars and trucks, including its marquee Mercedes-Benz franchise.

 

 

GM bond bulls, including analysts at JPMorgan and Morgan Stanley, have argued that the debt could rise to 40 cents on the dollar if the company’s recovery plays out and equity investors gravitate toward the debt ahead of an IPO. Probably the best plays are GM’s old convertible debt, including the 6.25% and 5.25% issues formerly listed under the tickers GPM and GBM. They trade for about $6.50 — 26% of their $25 face value.

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