Taxpayers could profit on GM bailout

By Chris Isidore, senior writer

NEW YORK ( -- General Motors' value has gone from zero to more than $60 billion in just over a year. That might just be fast enough for U.S. taxpayers to start recouping their investment.

GM, which wiped out the holdings of its previous shareholders when it filed for bankruptcy in June 2009, is preparing to once again sell shares to the public.

But with the market for new stock offerings still weak, getting the price needed to repay most of the bailout will be a challenge.

"The IPO market has been very difficult this whole year," said Steven Rattner, the Wall Street veteran who oversaw the bailout of GM for Treasury. "There's a long backlog of IPOs that are waiting and the ones that have gotten done haven't performed very well."

When GM filed for the IPO in August, some had speculated it could set a new record. Experts say it is now unlikely the GM IPO, expected this November, will come anywhere near the U.S. record of $17.9 billion raised by Visa when it when it went public in early 2008.

Research from Renaissance Capital shows that about 50% of IPOs so far this year have priced below the estimated price range in the company's filing. Typically only about a third of IPOs come in below the stated range. GM has yet to give a price range in its filings.

And while Treasury won't comment on the size of the IPO either, it is reportedly scaling back the number of shares likely to be offered for sale.

GM needs to have a market value of roughly $67 billion in order for taxpayers to break even on Treasury's 60.8% stake in the automaker.

But bond investors and some analysts believe the breakeven price target is still within reach.

Bonds, estimates point to strong pricing

Those investors who hold bonds in the old, bankrupt GM are due to receive shares in the new company as part of the final reorganization.

Current bond trading implies a market value for the new GM of at least $62 billion, said Kirk Ludtke, senior vice president of CRT Capital Group, an investment firm that has been tracking the value of GM's debt. Ludtke thinks the IPO will easily exceed that value.

"Given all the uncertainty, you'd expect [the bonds] to trade at a substantial discount of where the stock will trade," said Ludtke.

He said his estimates are that total GM shares will be worth between $82 billion to $87 billion, based on earnings and cash flow projections. Other analysts' estimates from earlier this year put GM's market value at between $64 billion and $90 billion.

If GM hits these valuations, it will be doing well by historic and industry standards.

Ford Motor, which avoided bankruptcy and has been steadily gaining U.S. market share in recent years while GM lost share, is worth only $43 billion today, despite its shares more than quadrupling in value over the last 18 months. GM's record-high market value was $61.3 billion in May of 1999.

Not everyone is so optimistic. Consultant Joe Phillippi of AutoTrends believes GM will have trouble topping Ford's market value.

"GM still has a lot of work to do," he said. "Just looking at it from perspective of their competitive position, I think the [bond] market is more than a little bit ahead of itself."

But other experts say GM's balance sheet is much stronger than Ford, helped by the fact that it shed most of its debt in bankruptcy.

Rattner said GM is ahead of where Treasury hoped the company would be in its turnaround efforts when it agreed to the bailout, and that the chances of making a profit on the shares are much greater than he expected at that time.

"Clearly GM is on an upward trajectory. The longer you wait, the better the pricing would be," he said. "But the government has a huge stake to sell."

And GM has the lead position and growing sales and market share in China, which is now the world's largest auto market. GM is likely to sell more cars in China this year than in the U.S.

A Chinese stake?

GM's main Chinese partner, SAIC Motor, has expressed an interest in buying a less than 10% stake in GM once it goes public. That could pose political challenges for Treasury, since there may be a backlash to the idea of a bailed-out automaker being owned by the Chinese.

GM won't comment on a possible purchase of shares by SAIC.

Treasury issued a statement saying that it would expect "investors will be sought across multiple geographies," but that "no single investor or group of investors receiving a disproportionate share or unusual treatment."

But a significant purchase by SAIC could help support the IPO price and help improve the chances of a profit on the bailout for taxpayers.

But GM's recent trip through bankruptcy could make investors cautious about a stake in the new company, said Matt Therian, research analyst with Renaissance Capital.

"People aren't going to forget about what happened with GM," said Therian. "It's going to come down to how well they can articulate what's different about this company." To top of page

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