SATURDAY, AUGUST 21, 2010
Who's Driving?
By ANDREW BARY
Washington and GM have very different goals. But both are eager for an IPO that could value the car maker at $60 billion.
GENERAL MOTORS' INITIAL PUBLIC OFFERING promises to be one of the largest, splashiest and possibly most contentious deals ever on Wall Street.
There are political overtones to the pricing of what could be a $15 billion transaction that usually aren't present with mega-IPOs, and that will make it a tricky proposition for its Wall Street underwriters, led by JPMorgan and Morgan Stanley. They certainly face a demanding client: President Obama has vowed that taxpayers will come out whole from the $50 billion investment that the Treasury made in GM last year to speed it through bankruptcy.
The Treasury owns 60.8% of General Motors, and while visiting the Midwest earlier this month, Obama stated: "We expect taxpayers will get back all the money my administration has invested in GM." It's rare that Wall Street has a client in the Oval Office, and one that is keenly interested in getting the best possible price on an IPO.
Cautious institutional investors, however, may seek pricing concessions, arguing that new GM is an unseasoned company with a new CEO and still-sizable employee obligations, that it's operating in a tough economy and within a fragmented and highly competitive global industry. Auto stocks here and abroad aren't highly valued in the stock market, and there are plenty of alternatives to GM, notably Ford Motor (ticker: F), whose shares, at around 11.75, trade for less than seven times projected 2010 profits.
Nobody directly involved with the General Motors offering–on Wall Street or in Detroit–is talking publicly. But Ed Whitacre, GM's soon-to-be-departing CEO, has said that he'd like to see Uncle Sam sell its entire stake so that the car maker can shed federal oversight and the stigma of being called "Government Motors." He won't get his wish yet because the Treasury is likely to reduce its stake to less than 50%, while still retaining a controlling interest. Treasury officials reportedly want to balance an interest in a larger sale with a desire for a higher price.
GENERAL MOTORS' MASSIVE, 734-page prospectus , filed last week, provides little new information, and leaves unanswered many key questions, including the size of the deal, the company's expected stock-market value, and whether Uncle Sam is likely to recoup his investment. Various reports have put the size of the offering near $15 billion.
The current trading of the debt of the old GM hints at the likely stock-market value of the company's new equity because bondholders will receive a mix of shares and equity warrants following the IPO. After talking with several institutional investors familiar with the GM situation, we figure that the company's market value could be around $66 billion, or $118 a share.
At $66 billion, GM would be valued at more than either Ford or Daimler (DAI.Germany), which are each at about $54 billion. At that price, the government would get back most of its GM investment, and it subsequently could come out whole if the shares were to rally after the IPO.
At $118, the Treasury's 304 million common shares would be worth $36 billion. The federal agency, which also owns $2.1 billion worth of GM preferred shares, already has received a loan payment of $6.7 billion from the auto manufacturer. Add it all up, and it comes to almost $45 billion. It would take a price of around $135 a common share to equal the Treasury's $50 billion investment.
At that price, GM's total market value would be $75 billion.
Our estimate of GM's potential stock-market worth could be conservative. CRT Capital Group analyst Kirk Ludtke published a report this month recommending the GM debt, saying that it could rise from a current price around 35 cents on the dollar to "the mid-40s." He also estimated that GM equity could be valued at $137 a share.
CRT is one of the few Wall Street firms with a published report on GM. Others that once covered GM debt, like JPMorgan, now are involved in the underwriting and thus aren't publishing anything. Earlier this year, JPMorgan credit analyst Eric Selle wrote that the debt was undervalued and ultimately could fetch 47 cents on the dollar.
Scott PollackBarron's wrote a bullish cover article on GM almost six months ago ("GM Is Back on Track," March 1). We argued that the company could go public in 2010 with a $50 billion-plus market cap.
The way for investors to play the new General Motors is through the debt of the old GM. Valuing that $27 billion (face amount) of debt isn't simple because the bonds are entitled to 50 million GM shares and two issues of warrants to buy more. The warrants, each involving 45.5 million shares, have strike prices of $30 and $55 and aren't easy to value. And there's an additional wrinkle: Bondholders aren't the only creditors entitled to the stock and warrants. There may be at least $37 billion of total claims allowed by the bankruptcy court, GM said in its IPO prospectus. This means that the stock and warrants will be apportioned to a larger group of creditors than just bondholders.
LUDTKE IS PARTIAL to what are known as GM's "baby bonds." These securities, including convertible debt, originally were sold with a $25 face value and often ended up in the hands of retail investors. They now trade at a discount –largely for liquidity reasons–to GM's old institutionally targeted debt like the 8 ⅜s of 2033 with a $1,000 face value. The baby bonds trade around 8, or 32 cents on the dollar, versus about 35 cents on the dollar for the institutional debt. "We continue to believe that the most attractive way to gain exposure to [GM] is the senior notes commonly referred to as "Baby Bonds," Ludtke wrote.
GM's old common stock, now traded under the name Motors Liquidation (MTLQQ), trades for 40 cents and probably will have little or no recovery value.
Looking Under the Hood
The new and improved General Motors, whose initial public offering could come to market before the November elections, has stronger sales and a better balance sheet, but it still has sizable pension and health-care obligations. GM may have a market value of about $66 billion, or $118 a share.
ONE ISSUE CLOUDING any GM IPO analysis: The number of shares to use in the calculation remains unclear. GM has 500 million common shares outstanding. Along with the U.S.'s 304 million (60.8%), the total includes the Canadian government's 58.4 million (11.7%), the United Auto Workers health-care trust's 87.5 million (17.5%) and the 50 million (10%) to which bondholders of old GM and other creditors are entitled. We're using a share count of 558 million, which reflects the 91 million of deep in-the-money warrants, adjusted for their exercise prices.
Any calculation of the company's potential value also must make assumptions about how healthy the economy and the global auto market will be next year. Investors generally make a projection of GM's 2011 cash flow, assign a multiple to that, and then value other assets, notably the company's Chinese joint ventures, as well as equity stakes in its former auto-parts unit, Delphi, and Ally Financial, the old General Motors Acceptance Corp.
Even after bankruptcy, GM has sizable employee obligations, including $26 billion in unfunded pension liabilities and $9 billion of retiree health-care costs. Those liabilities detract from the valuation. However, thanks to Uncle Sam, it now has a great balance sheet with a hefty cash position of $32.5 billion, offset by debt and preferred stock totaling $17 billion.
THE NO 1 U.S. AUTO MAKER has made big strides since emerging from bankruptcy protection in July 2009. It earned $1.3 billion in the second quarter, including a sizable profit in its formerly troubled North American division, whose market share has stabilized after decades of decline. GM also has valuable and lucrative operations in the developing world, notably several joint ventures in China that have a combined No. 1 share in what is the globe's largest auto market by sales volume.
Impressively, GM earned $1.6 billion before taxes in North America during the second quarter, despite an annualized industry selling rate of 11.5 million–a depressed level that probably would have produced huge losses at the pre-bailout GM. Before 2008, industry sales regularly ran at more than 16 million vehicles annually. The auto maker finally has a competitive cost structure and popular vehicles like the Chevrolet Traverse, Cadillac SRX and Buick LaCrosse that are selling without outsized incentives.
We're assuming that GM generates $12 billion of 2011 pre-tax cash flow and that the markets effectively will assign a multiple of 4.5 to that amount. We're valuing GM's Chinese joint ventures at $16 billion, or 10 times the annualized profits in the first half of 2010. And adjusted for a 35% tax rate, GM's employee obligations—$26 billion for pensions and $9 billion for post-retirement health care—produce a liability of $23 billion. General Motors doesn't have to kick in money for the pension deficit until 2014.
Bulls argue that GM's cash flow next year will be higher than our estimate of $12 billion if the economy strengthens and auto sales improve modestly. Its cash flow in the first half of 2010 was about $6 billion, excluding its Chinese operations.
There are several reasons, however, to expect GM's equity valuation to be closer to our estimate than the more bullish forecasts. A weakening U.S. economy is raising doubts about a strong upturn in domestic vehicle sales next year. Rival Ford's shares have slid below $12 from a spring peak of almost $15.
Ford is valued at less than seven times projected 2010 earnings of $1.75 a share and 4.5 to five times expected 2011 pre-tax cash flow. One reason for Ford's low price/earnings multiple is that its domestic profits now are sheltered from taxes because of past losses. GM similarly can shelter an estimated $19 billion of future U.S. profits from taxation. (To keep our calculations conservative, we assign no value to those tax assets.)
Big Wheels
The key holders of GM equity. The company won't be selling any common shares, but will be issuing convertible preferred stock.
Some investors figure that it's simpler to play the auto industry through Ford or Daimler than via GM debt or waiting for the new GM equity. General Motors' debt and Ford common now are valued comparably, while investors are paying a reasonable 11 times earnings for Daimler and its strong Mercedes' luxury franchise and a large and profitable global truck business.
FORD HAS SOME ADVANTAGES over GM, including more profitable North American operations, a stronger CEO in former Boeing boss Alan Mulally, a wholly owned finance unit and a better European operation. Ford's European unit is making a profit; GM's, which is being reorganized, is in the red.
On Sept. 1, Whitacre will cede his CEO job to current GM director Daniel Akerson, a blunt, former telecom executive without any automotive experience. The transition may not help the pricing of the IPO, but it's worth noting that Whitacre, who will remain chairman and is credited with driving GM's revival, had no auto-industry experience either before coming to General Motors.
GM has no captive finance unit because it sold a majority stake in General Motors Acceptance Corp. in 2006 in a bid to raise cash. Ford held on to Ford Motor Credit, giving it an advantage in financing vehicle loans. GM is seeking to address this deficiency by purchasing AmeriCredit, which provides subprime financing, for $3.5 billion.
GM's advantages over Ford include stronger operations in the developing world, including Brazil, India, and China, as well as a healthier balance sheet.
Underwriters often price big IPOs at some discount to the market to entice investors, but that may be difficult because any concession would come at taxpayers' expense.
The $19 billion Visa IPO in 2008 was priced at $44 and the stock finished its first day of trading at $56.50. The GM underwriters are expected to earn a fee somewhere around $100 million, or 0.75%, on the deal—a nice payday, but less than they would typically get for such a large initial public offering. Wall Street firms lobbied hard for a role in the IPO, even sending their CEOs to Washington. Giant equity underwritings generally are easy money for the Street because firms build in a large price cushion to ensure a successful and profitable deal–for themselves. This one, however, looks tougher.
Financial Road Race
The potential GM equity sellers beside the U.S. government are Canada and the UAW. GM itself doesn't plan to sell any common, but will issue an undetermined amount of convertible preferred stock. The auto maker doesn't plan to pay a dividend on its common stock.
ONE GM BONDHOLDER says that the IPO's timing could hinge on the likely price. If there is strong demand, the deal is apt to come in October, before the November congressional elections, in order to bolster Obama. If demand is lackluster, the date could slip into November, to avoid embarrassing the president before the election.
Barron's has written about the unequal—and unfair—treatment of the UAW and GM's bondholders in the bankruptcy, and the IPO will underscore that disparity. The UAW had a post-retirement health-care claim worth $20 billion that received a mix of debt, preferred stock and common stock in the bankruptcy. The UAW could come out whole after the offering.
Bondholders with a similar legal claim are getting a package of stock and warrants now worth 35 cents on the dollar. Even Uncle Sam is apt to take a loss. In its politically orchestrated bankruptcy, GM didn't seek to restructure its enormous pension plan, mostly earmarked for the UAW.
Although the big vehicle producer has made great strides since the bankruptcy, successfully pulling off the IPO won't be easy, given the company's history and investors' worries about the economy and the vehicle market.
The underwriters must please both a tough client in the White House and cautious institutional buyers. Expect a price of $100 to $140 a share, a GM stock-market value of $60 billion or more, and plenty of drama in what is likely to be the deal of the year.
Copyright 2010 Dow Jones & Company, Inc. All Rights Reserved
0 comments:
Publicar un comentario