General Motors Co.’s initial public offering this week is proving a tough sell for most fund managers who largely view it more as chance for the U.S. and Canadian governments to begin offloading their investment in the company than an opportunity for investors to get in on the bottom floor.
That said, it appears there are enough heavy-hitting money managers jostling to ride shotgun to make the GM restart at least a partial success. The IPO has already garnered about US$60-billion in investor demand, according to Reuters, about several times the total of US$13-billion the company is looking to raise.
The Detroit automaker is expected to price the deal on Wednesday somewhere between US$26 to US$29 a share after a three-for-one stock split. Its shares will then begin trading on the Toronto Stock Exchange and the New York Stock Exchange the following day for the first time since it went into creditor protection in the summer of 2009.
The U.S., Canadian and Ontario governments, which bailed the automaker out with taxpayer money last summer, will use the IPO to gauge the public interest in the company.
While GM has paid back about US$8-billion in loans to all three governments, the bulk of their initial investments remain in the form of equity in the company.
The U.S. Treasury, which owns 61% of the company with its remaining US$50-billion investment, aims to raise up to US$7.7-billion in the offering, and reduce its stake to 43%. The Canadian and Ontario governments, which collectively own 11.7% of the company after their $9.5-billion investment, hope to reduce their holdings to 9.6%.
One U.S.-based fund manager, who asked not to be named, said he was weighing whether to participate in the IPO because he believes in the company’s strategy and that, by his math, the price range it will be offered at is at a discount to rival Ford Motor Co.
David Whiston, an auto equity analyst with Morningstar.com, said he thinks both GM and Ford are a good investment at this point, but that there is a greater upside to GM.
While admitting he is bullish on the company’s outlook, he estimates the fair value of its shares at US$44 apiece.
“Although the ‘Government Motors’ stigma is likely to hang over General Motors Co. for years, we think GM’s car models have their best quality and design in decades,” he said in a recent analysis of the IPO.
“Although these concerns are valid, we see them as short-term issues. We think the company is about to see the upside to having a high degree of operating leverage,” he said.
GM’s pitch to investors is simple. After its restructuring, the automaker says it can now turn a profit with a 19% market share when U.S. auto sales are between 10.5 million and 11 million units. That is a dramatic reduction from the 25% market share on sales of 15.5 million units it needed before its restructuring, said Chris Liddell, GM chief financial officer, in a video roadshow to promote the IPO.
In October, U.S. auto sales hit 12 million units on a seasonally adjusted annualized rate, up from its average of 11.3 million units in the first nine months of the year, according to Scotia Economics. Mr. Whiston said he believes North American sales could grow to 13 million units in 2013, and to 18.5 million units by 2012.
Unlike many of its U.S. competitors, GM also has a strong foothold in emerging markets, and in particular China, the world’s largest market for cars and trucks.
Year to date, GM’s market share of light-vehicle sales in China is about 9.3%, or roughly 787,000 vehicles, compared with Ford at 2.6%, or 218,670 vehicles, according to J.D. Powers and Associates. If you include all of GM’s joint ventures in the country, however, like Wuling Motors, its market share is about 13%, the research firm said.
In addition, SAIC, GM’s chief Chinese partner, is also said to be considering buying a stake in the automaker during its IPO next week.
The recovery in the auto industry is clearly still in its early phases, but Mr. Liddell said he expects GM will be able to generate a pre-tax profit of about US$13-billion in the middle of the cycle, and up to US$19-billion at its peak. The company could also generate up to US$10-billion in free cash in the middle of the cycle and US$16-billion at its peak, he said.
By contrast, Ford Motor Co. has reported pre-tax earnings of just over US$7-billion in the first nine months of 2010. GM said this week it earned US$2-billion during the third-quarter, adding to the US$1.2-billion it had earned in the first two quarters of the year.
GM’s outlook has been aided by an US$11-billion reduction in its health-care costs over the past five years to US$5-billion in 2010, and “minimal net interest costs and minimal tax payments given our significant tax losses,” Mr. Liddell said, noting its long-term debt had been reduced to about US$2.6-billion, excluding its preferred shares.
GM has also been able to carry over about US$45.4-billion in tax benefits from its previous losses that can used against future earnings in the coming years, the company says.
Still, despite the fact that GM’s operations and books have been overhauled in the lead-up to the IPO, there are many that are still hesitant to buy in.
The fact that all three governments will be left holding the bulk of their investments is making GM’s IPO a tough sell with many fund managers. After the stock split, it is estimated GM’s shares would have to rise to US$43.67 apiece before the governments could break even on their remaining investment. Some wonder whether that will create a cap on the shares.
“My issue isn’t so much the viability of the business, it’s really the overhang of government ownership that’s going to probably weigh on the stock for a while as they filter their holdings out,” said Jack Ablin, chief investment officer at Harris Private Bank in Chicago, which manages about US$55-billion in assets.
He said if the governments continually sell off their shares whenever they reach a point where they can turn a profit, it will likely weigh on the shares until they exit their entire investment. “Look at Citigroup [Inc.], every time it gets to around US$4 a share, the government starts to sell,” Mr. Ablin said.
In the absence of a dividend, he questioned where investor income would be derived until the uncertainty of the governments’ investments are lifted.
“If they were an institutional company that was a long-term holder, or something else, it would be different. But we understand that the government is not in the business of holding stock and it’s their job to unload it,” he said. “That’s all. It’s just a matter of supply and demand.”
John Stephenson, senior vice-president at First Asset Investment Management Inc., said he believes the pricing is “a little rich.”
“While it has a good recovery from the bottom, just looking forward at the growth plans and some of the other legacy issues, such as the health benefits, etc., I think it’s going to struggle going forward,” he said. “While it’s certainly exciting that the government has the potential to exit its position, we’re not looking at GM at this time.”
There are others who simply won’t consider an investment in automakers because they typically direct the bulk of their free cash to capital expenditures and their financing arms.
“I’ve never in my life invested in an auto manufacturer,” said Richard Jenkins, who runs Black Creek Investment Management and a former auto-parts analyst. “For many reasons, the sector globally runs at massive overcapacity. A lot of it has to do with it being a strategically important industry for countries and regions, and for the very reason that people went in and provided it with capital when it was in trouble, those are the very reasons why the industry, long-run, is a tough place to invest.”
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