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GM at $100 a Share May Tempt Warrant Holders, Dilute U.S. Stake

GM at $100 a Share May Tempt Warrant Holders, Dilute U.S. Stake

April 30, 2010, 12:18 AM EDT

By Jeff Green

April 30 (Bloomberg) — General Motors Co. may be able to command a stock price greater than $100, tempting holders of warrants to buy shares that would reduce the U.S. government’s controlling stake.

Improvement in GM’s cash generation and profit outlook, just nine months after emerging from bankruptcy, may set the equity value of the company at about $68.6 billion, JPMorgan Chase & Co. debt analyst Eric Selle said in an April 26 report. That would be 50 percent more than Ford Motor Co. and lead to a share price of $113 to $137 a share, depending on dilution.

“I’m optimistic that GM is going to have a tremendously successful IPO and maybe eventually get to $100 a share or more,” said Maryann Keller, president of consultant Maryann Keller & Associates in Stamford, Connecticut. “The proof is going to be whether people are walking into dealerships and putting money down to buy a car.”

GM, the largest U.S. automaker, plans an initial public offering of shares as early as this year. The U.S. government’s 60.8 percent equity stake in GM is from its aid in the company’s July 2009 exit from court protection. The warrants would let a union fund and debtors recoup more of their bankruptcy losses.

GM will have to continue to show an ability to attract buyers this year, analyst Keller said. GM’s U.S. sales rose 17 percent in the first quarter as the industry total increased 15 percent.

“You cannot have high valuation on this stock without momentum in the market,” she said.

Ownership Stakes

GM’s ownership is split up on the basis of 500 million shares. Warrants to sell 106 million additional shares at prices of $30 to $126.92 apiece could dilute the U.S. stake to 50.2 percent. The old GM had about 565 million shares that peaked at $94.63 in April 2000, according to Global Financial Data in Los Angeles.

Chairman and Chief Executive Officer Ed Whitacre said on April 21 that he envisions selling GM shares to the public this year, as the automaker returns to independence.

“You have basically the full support of the U.S. government behind this company, and that’s going to help support the value,” said Mirko Mikelic, senior portfolio manager at Fifth Third Asset Management in Grand Rapids, Michigan. He helps manage about $18 billion, including debt of GMAC Inc., the finance company that was formerly part of the automaker.

A value of as much as $137 a share might cause the debtors from GM’s predecessor and the United Auto Workers retiree health-care fund to exercise their warrants for more stock in the company, Mikelic said.

Stock Warrants

The debtors have warrants to buy 45.5 million more shares at $30 each and another 45.5 million at $55 each, while the retiree fund has the right to purchase 15.2 million at $126.92 apiece, according to GM regulatory filings.

“GM isn’t a joke anymore,” said Rebecca Lindland, an analyst at auto forecaster IHS Global Insight in Lexington, Massachusetts. “They are paying back loans and Ed Whitacre is the real deal.”

In addition to the U.S. government’s majority stake, the UAW fund now holds 17.5 percent of GM, the Canadian government has 11.7 percent and the debtors own 10 percent.

If all the warrants are exercised, the debtors’ stake would rise to 23.2 percent, while the other holdings would decline to 50.2 percent for the U.S., 16.9 percent for the UAW fund and 9.6 percent for Canada. Sale of the shares to satisfy the warrants would raise $5.8 billion for GM.

At the estimated $68.6 billion total value for GM, the U.S. government’s fully diluted stake would be worth $34.4 billion, compared with $41.7 billion without any dilution from the warrants.

U.S. Position

The government’s current net investment in the automaker is $42.2 billion, according to a senior official of President Barack Obama’s administration. That’s after GM has repaid $6.7 billion in loans and paid $600 million in interest and dividends. The government also holds $2.1 billion in the company’s preferred shares.

The government now estimates that any losses on its auto investment will be substantially less than it expected six months ago, the U.S. official said, without giving figures.

“The stock could be worth a lot,” CEO Whitacre told reporters in Washington last week, after GM announced that it had finished repaying the $6.7 billion from the Troubled Asset Relief Program. “The taxpayer could get all their money, plus, back.”

Eliminating those loans, which were due by 2015, “shows GM’s confidence in the recovery, because they are giving up cash to pay off the debt,” Selle, the JPMorgan fixed-income analyst who estimated the equity value of the company, said in an interview discussing the report.

45 Cents

Selle said debtors who hold the equity stake and warrants may recoup about 45 cents on the dollar when GM goes public and their bonds are converted into the automaker’s new shares.

GM’s 8.375 percent bonds due July 2033 closed at 38 cents on the dollar on April 28, according to Trace, the bond-pricing service of the Financial Industry Regulatory Authority. The bonds were issued by the automaker’s predecessor, General Motors Corp.

At yesterday’s bond prices, compared with Selle’s 45 cent estimate, GM is worth about $58 billion, or 26 percent more than Ford’s $46 billion. Toyota Motor Corp., the world’s largest automaker, is worth $135 billion, and Volkswagen AG, Europe’s biggest, is worth $44 billion.

Shares in the old GM, which still trade under the MTLQQ ticker, will be worthless once the bankruptcy is complete and have no connection with the stock created for the new GM.

Generating Cash

GM said on April 7 that it generated $1 billion in cash last year and is getting closer to break-even on an operating basis. The company plans to release first-quarter results in mid-May.

“Our version of equity is the product and the product is just really good,” said Lindland, who was in Germany this week driving the new Buick Regal sedan.

“Ed Whitacre has been more successful than anyone expected at bringing financial legitimacy back to GM. Everyone just expected that they would never pay the government back and I guess Ed Whitacre didn’t get the message.”

Bondholders with about $27.2 billion of the old GM’s debt, led by Franklin Advisors and Fidelity Management, agreed to accept the 10 percent stake and the warrants in the new company.

A Fidelity spokeswoman, Sophie Launay, wouldn’t comment on the warrants or its investment. Stacey Johnston, a spokeswoman for Franklin, and Andy Mass, a spokesman for FTI Consultants, which represents the creditors in the GM bankruptcy, also declined to comment.

UAW Warrants

GM, Ford and Chrysler LLC in 2007 contract talks with the UAW each agreed to form a retiree health-care trust, known as a Voluntary Employee Beneficiary Association, or VEBA. The trusts were funded with stock, cash and warrants, and assumed responsibility for medical costs of union retirees.

Ford said in March that it expected the VEBA for its UAW retirees to raise $1.78 billion from the sale of warrants to buy Ford shares. The automaker said on March 29 that the trust would sell all of its 362.4 million warrants.

It’s premature to determine when the VEBA for GM retirees will execute or sell its warrants, said Nell Hennessy, CEO of Fiduciary Counselors Inc., which is advising the fund on the share-purchase rights.

“This is a good example of how the federal bailout money is helping regular people,” she said. “The GM VEBA has other assets that we can use to pay benefits, so we have no pressure to sell GM equity quickly.”

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