Will taxpayers get their money back from GM?

By Nick Kurczewski Edmunds.com

(June 2010) A year after General Motors filed for Chapter 11 bankruptcy, the hot topic is no longer whether GM deserved to be bailed out by the government, but how much the "new" GM might be worth on Wall Street — and whether taxpayers, who own 60 percent of the automaker, stand a chance at getting their money back from the federal bailout.

After its brush with death, GM executives are eager to issue an initial public offering and return to being a publicly traded company. GM CEO Ed Whitacre repeatedly speaks of an IPO taking place as early as later this year or early 2011.

On June 10, the U.S. Treasury Department, which owns 61 percent of GM, said in a statement that the IPO won't come before October and that the timing is up to GM.

"GM must determine that it is, in all relevant respects, ready to become a public company. It is critical that the process of preparing for a potential IPO be managed by GM," the government statement said.

The government will mostly stay out of the process, the statement said. Yet, the Treasury Department will decide on the fees to be paid to underwriters. Bloomberg News reported those fees will be far lower than any lPO worth over $5 billion since 1999.

On Friday, June 11, the Wall Street Journal, quoting sources, reported that Morgan Stanley and J.P. Morgan Chase & Co. are expected to win the lead underwriting roles for GM's offering, likely one of the biggest in the past five years.

What remains to be seen is whether Wall Street -- and, eventually, individual investors --will be sufficiently enticed by the balance sheet of the new GM to make an IPO successful.

"They've (GM) got pretty good momentum with their new product," said Joe Phillippi of Auto Trends Consulting in Short Hills, N.J. But Phillippi said the success of GM's IPO will hinge upon much more than one positive quarter and a few strong-selling vehicles. "They're still struggling with market share, and I know that's bothering the (institutional investors) on the buy side."

A representative for Goldman Sachs responded to AutoObserver.com via e-mail, stating succinctly that the firm could not discuss General Motors as Goldman Sachs "does not discuss IPOs or companies we don't cover." A representative with Morgan Stanley similarly deferred comment, noting the firm does not have "a General Motors analyst."

Not everyone, however, is treading as lightly when it comes to putting a price tag on the future GM. Many analysts remain upbeat about GM's prospects and its potential value when the company eventually goes public. A research analyst with JP Morgan Chase recently estimated the value of new GM at a whopping $90 billion, according to a report by CNNMoney.com.

That sounds impossibly high, but it's not a figure pulled out of thin air, said Kirk Ludtke, senior vice president at CRT Capital Group LLC in Stamford, Conn. Among many other factors, part of gauging the value of new GM is a function of estimating the value of old GM -- in particular, those old GM bonds. Holders of the $27 billion worth of old GM bond debt will convert these notes to stock once the company goes public.

"These notes currently trade in the low 30s [cents per dollar]," Ludtke said. "We believe they're worth in the low 40s," which equates to an overall value of approximately $75 billion."

Moving cars and trucks out of dealer showrooms could prove much easier than persuading Wall Street to take another chance on GM. After all, it would take a severe bout of investor amnesia to forget that on the final day of trading before filing for bankruptcy, GM's stock was hovering below 75 cents per share. Or that between 2004 and the first quarter of 2009 the company lost an almost-unbelievable $82 billion.

At present GM is 60.8 percent owned by the U.S. government, with the UAW owning 17.5 percent and the Canadian government 11.7 percent. The remaining 10 percent is owned by holders of $27 billion worth of old GM bond debt, which will be converted to stock after the IPO. Although a higher valuation for GM means a win-win scenario for both the automaker and taxpayers, not everyone is ready to hazard a guess as to how much GM might be worth. GM Ownership.JPG

In 1980, GM controlled more than 40 percent of the U.S. automobile market. Today that figure stands at 17.8 percent, according to the latest sales data. With Saturn, Hummer and Pontiac now relegated to the scrap heap it will be hard for GM to significantly increase this figure any time soon. There is also continuing upheaval in global stock markets, which have recently been shaken by everything from EU austerity measures to oil spills and a tense political standoff on the Korean peninsula.

Far from out of the woods, GM at least seems back from the brink. U.S. sales have risen by 17 percent, according to Edmunds.com sales data. This is due in no small part to strong-selling vehicles such as the Chevrolet Equinox and GMC Terrain crossovers, along with the new Buick LaCrosse sedan. GM reported net income rose to $865 million and revenue was up 40 percent -- a stark contrast to the $6 billion loss reported during the same period in 2009.

But to pay off all outstanding debts, GM's IPO would need to raise approximately $70 billion. As the Detroit Free Press points out, this figure would make GM worth nearly twice as much as Ford -- a company that, it is often noted, accepted no government loans and has been praised by the automotive press for managing to stay out of the bankruptcy morass while also executing a singular scheme ("Ford One") to quickly and drastically adapt its product portfolio to new customer desires.

Nonetheless, CRT Capital Group's Ludtke seems convinced projections of GM's potential value -- and thus the likely success of its IPO -- are the real deal. And that all GM's current owners could win.

"Based on our valuation," he said, "the U.S. taxpayer has a good shot at breaking even on the GM bailout."