GM Launches IPO
By Chris Haak
General Motors Company, a little over a year after exiting Chapter 11 bankruptcy protection, launched its initial public offering yesterday. It marks the first time that the public will be allowed to directly own shares in the reborn automaker since the middle of 2009 when it all came crashing down.
GM expects to sell 365 million shares of common stock, likely priced between $26 and $29 USD per share (the final price is to be set on November 17), during its IPO. The offering would then yield between $9.5 billion USD and $10.6 billion USD. The actual shares to be sold in the IPO belong to the U.S. Treasury, a union-run trust and Canadian federal and provincial governments. Altogether, the 365 million shares represent about a quarter of GM’s total shares.
With the share sale, the US Treasury’s stake in GM is expected to drop from 61 percent to 43.3 percent. The UAW VEBA trust is expected to sell enough shares to drop its ownership stake from 17.5 percent to 15 percent, and the Canadian and Ontario governments will cut its stake from 11.7 percent to 9.6 percent.
As the various non-GM owners are going to reap the proceeds of the IPO of the common shares, GM is also planning to sell 60 million shares of its Series B preferred stock at $60 per share. The proceeds from the sale of the preferred stock will go directly to GM’s corporate coffers and help fund operations, new-vehicle development, and so forth.
To drum up investor interest, GM is doing a few things. The company is undertaking a stock split in conjunction with the IPO that will split the shares into tree – making a total number of 1.5 billion common shares available, and making the offering price low enough so that smaller investors can snap up shares without a high upfront cost. Also, senior executives have embarked on a “road show” to promote the initial public offering. The road show will, curiously, not involve much driving, but instead will rely on chartered corporate jets to ferry executives from presentation to presentation. There has been a bit of controversy about that aspect of the road show, given the shellacking the Big Three received from Congress for traveling via corporate aircraft, hat-in-hand asking for bailouts in late 2008.
Although the company’s final third quarter 2010 results are only slated to be released on November 10, GM said that its revenue should ring in about $34 billion, with net income between $1.9 billion and $2.1 billion. CFO Chris Liddell told potential investors in an online pitch today that, thanks to bankruptcy stripping away debt and cost, the company can generate $11 billion to $13 billion in annual pretax profit and profit margins of 7% to 8% as the North American auto market recovers, and a staggering pretax annual profit of $17 billion to $19 billion, with profit margins of 9% to 10%.
Ford, in contrast, has pulled in $6.3 billion in a recovering market through the first three quarters this year, and is on pace to top its all-time record annual profit of $7.24 billion, back in the SUV-boom year of 1999.
Finally, in another tidbit that the Wall Street Journal uncovered this week, GM has a deferred tax benefit from tax-loss carry-forwards and other provisions. The losses that created these benefits were, naturally, incurred by Old GM during the years that it was in the midst of its death spiral into bankruptcy earlier in the decade. The benefits will allow GM to use losses in prior years and costs related to pensions and other expenses to shield profits from U.S. taxes for up to 20 years. In this specific situation, the benefit is worth a staggering $45.4 billion USD, of which $18.9 billion USD comes from carry-forwards and the remainder comes from costs like pensions and other post-retirement benefits, and property, plants and equipment.
Effectively, GM will not have to pay federal income tax for years to come, even if the top-end $19 billion profit numbers cited by Chris Liddell come to fruition. The purpose of the special tax rule for TARP-assisted companies is to make them more attractive for investors, with the idea that the company would then be more attractive to investors, and would therefore increase the chances of the government getting its bailout money back.
GM’s financial prospects do indeed look fairly rosy at the moment. We can only hope as fans of outstanding products that GM reinvests large portions of the profit windfall into new vehicle development, and actually meets its stated objective of building the best, most desirable vehicles in the world.
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