Forget last week’s midterm elections. The biggest vote of the year in the automotive industry will come next week when General Motors asks potential investors for a vote of confidence in the amount of $13 billion to fund its return to public trading.
The precise date of the so-called initial public offering, or IPO, has not been confirmed, but it’s widely expected to happen Nov. 18. In the meantime, senior GM managers have fanned out across the globe, trying to win commitments from key investors — potentially including several sovereign wealth funds in the Middle East and even SAIC, GM’s Chinese partner for developing alternative-energy vehicles.
The sales pitch isn’t easy. Investors have long memories, and they remember the General Motors that filed for bankruptcy in June 2009, wiping out billions of dollars in stock and bondholder assets. But money managers are also loath to pass up a good deal, and when it comes to future opportunities GM has a very good story to tell.
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“I know a great investment opportunity, and the new GM is just that,” GM chief executive Daniel Akerson said in a video presentation posted on the Internet last week. “We can make significant profit even in today’s difficult environment.”
GM said Wednesday it made $2 billion in the July-September quarter, its third consecutive quarter in the black. That’s all the more impressive when you remember that 2010 was one of the worst years ever for the industry.
Should the industry return to the annual sales peak of 17 million units by mid-decade, as some analysts expect, the automaker’s annual earnings could push north of $13 billion, said GM Chief Financial Officer Chris Liddell.
Better yet, GM stands to benefit from a little-noticed tax ruling handed down last year that will allow it to carry forward huge pre-bankruptcy losses of about $45 billion for up to 20 years.
But whether the car market can regain its past glory is uncertain.
There is a “very realistic” possibility the current sales cycle could peak at substantially less than 17 million vehicles, acknowledged Don Johnson, GM’s sales chief. Even so, the company’s post-bankruptcy business plan is designed to keep the company in the black even if sales fall to 10.5 million, he said.
October sales were good for the industry overall, with an annualized sales rate of around 12 million, but they were especially good for GM, which saw sales rise more than 13 percent year-over-year. At the same time, GM spent less on sales incentives while the company’s average transaction price — what a consumer actually winds up spending on a vehicle — was up by several thousand dollars.
The credit goes to new models like the Chevrolet Equinox and the Buick LaCrosse, which have been in high demand and short supply of late. Perhaps more importantly these cars are winning rave reviews from even the skeptical Consumer Reports magazine, which in its latest issue added a number of GM models to its influential “Recommended Buy” list.
“The big news out of the [Consumer Reports] survey this year is how well GM has done,” David Champion, head of Consumer Reports’ Auto Test Division, said last month in a presentation to the Detroit Automotive Press Association.
Strong sales in North America will be critical to GM’s success, but less so each year. The carmaker now generates about two-thirds of its sales volume outside the United States (though significantly less on a dollar basis). And the numbers are growing each year.
Last month, GM became the first automaker to top 2 million unit sales in a single year in China, and that number could reach 2.5 million before the books are closed on 2010. Meanwhile, GM is entering into a new agreement with long-time partner SAIC, a Chinese automobile manufacturer, that could not only expand its position in China, the world’s largest national car market, but also expand sales in the next boom market, India.
The SAIC deal also underscores the challenges GM faces. SAIC is a partner with GM’s archrival Volkswagen, and the Chinese company is set on building its own brands, which could eventually threaten both of those Western automakers.
There are tremendous opportunities in emerging markets, but equally significant uncertainties. Of course, the same could be said for the rest of the world. Europe is in turmoil, faced with tremendous overcapacity and struggling national economies. Opel, GM’s German-based subsidiary, has picked up some momentum since the company abandoned plans to sell off a controlling stake last year. But a true turnaround is anything but apparent.
Will investors see GM’s glass as half-empty or half-full? The carmaker is riding a middle line. It priced its IPO higher than some of the skeptics among its underwriters had called for. But at $26 to $29 a share, that’s still short of $30 — the so-called “Obama number” that the White House had wanted.
The administration hopes to minimize its losses when it sells off a third of the GM holdings it acquired in return for its $50 billion bailout of the company. The stock offering will reduce the government's stake from 60.1 percent to about 40 percent. Based on the $26 to $29 price range GM has set, the government could lose as much as $5.4 billion on the stock that will be sold off during the IPO. Whether it will lose money when the remaining 40 percent is auctioned off depends on the share price then.
The hope is that the newly public GM shares will ride on the coattails of crosstown rival Ford, which this week has been trading at over $16 a share, its highest level since mid-2004. That’s up from a low point of $1.26 in November 2008.
If GM shares posted even a fraction of that gain, subsequent offerings of the remaining U.S. Treasury shares could actually prove profitable. And that might be the best the current administration could hope for in light of last week’s elections.
(You can read the complete prospectus GM filed with the SEC by clicking here.)
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