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Taxpayers could profit on pre-owned GM

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Taxpayers could profit on pre-owned GM

Soyoung Kim


Fri Jun 11, 2010 7:28pm EDT

(Reuters) - When GM was sputtering toward collapse last year, it was hard to see how the U.S. auto market leader could keep selling cars -- let alone how it could one day sell itself as a success story to investors.


But almost a year after emerging from an unpopular government-funded bankruptcy, GM is driving toward a stock listing that could deliver a paper profit to U.S. taxpayers and an important political win for the Obama administration.

Analysts estimate that a GM initial public offering could value the company between $70 billion and $90 billion -- above the peak of the automaker's market value near $60 billion in 2000 when it was riding high in a booming market for SUVs.

GM and the U.S. Treasury are now readying an initial public offering of GM stock that would reduce the U.S. government's nearly 61 percent ownership stake.

The Treasury, which has hired Lazard Ltd (LAZ.N) as adviser on the IPO, said on Thursday it expected to sell part of its stake when GM goes public as early as the fourth quarter.

JPMorgan Chase & Co and Morgan Stanley are set to be named underwriters for the GM deal, a source told Reuters on Friday.

Figuring out how investors will value the new GM is tricky, but analysts say trading in bonds issued by the pre-bankruptcy automaker and a comparison with its closest rival, Ford Motor Co (F.N), underscore the surprising scale of its turnaround.

Any equity value for GM above $70 billion will result in a paper profit for the U.S. Treasury, which poured more than $50 billion into GM and retains a 60.8 percent ownership stake.

"Everybody will look at this valuation as a sign of success for this corporation and the bailout," said a person who has worked with the Obama administration's autos task force, but who was not authorized to discuss the matter for attribution.

Based on bonds issued by the old GM, the new GM could be worth as much as $88 billion after going public again.

The $27 billion in bonds issued by the pre-bankruptcy GM represent a 10 percent equity stake in the new company under the terms of the restructuring negotiated by the White House.

The old GM bonds have been trading at between 31 cents and 32.5 cents on the dollar this week as talk of an IPO heated up. That represents an implied equity value of between $8.4 billion and $8.8 billion for bondholders and up to $88 billion for the whole company.

A valuation for GM at the high end of that range would also mean taxpayers could be sitting on unrealized profits of about $10 billion on the government's stake in the automaker.


The projected GM valuation would far exceed some $38 billion market value of Ford Motor Co (F.N), but trail the nearly $120 billion value of Toyota Motor Corp (7203.T).

Ford, the only U.S. automaker to have avoided bankruptcy and bailout, trades at about 4.3 times a projected measure of its cash flow.

That category of cash flow -- earnings before interest, tax, depreciation and amortization, or EBITDA -- is expected to be $8.9 billion this year for Ford, according to the average analyst forecast as tracked by Thomson Reuters I/B/E/S.

JPMorgan debt analyst Eric Selle sees GM's 2010 EBITDA at $11.4 billion, which would value the company at around $50 billion. But Selle reckons GM's shares may be worth a higher multiple of cash flow because the company has far less debt. He sees a $90 billion GM equity valuation as reasonable.

While Ford carried $34 billion of debt on its balance sheet at the end of the first quarter, a comparable long-term debt number for GM was near $14 billion.

"When you look at the enterprise value, you have to look at the value of debt and equity. For GM, more enterprise value belongs to equity holders than it would for Ford's case," said Morningstar analyst David Whiston.

GM's U.S. sales rose 14 percent through May for 19 percent of its home market. Ford's U.S. sales were up 30 percent in the same period, but it remains No. 2 with 17 percent market share.

"Ford may be doing all the right things, but it is still a smaller company," said Chris Price, managing director of investment banking at O'Keefe & Associates.

Still, the path to a GM IPO will not be smooth. The automaker still needs to restructure its European unit, Opel, and it remains at risk of being hit by a double-dip downturn.

"The automotive recovery is really only about six months old. It's still early to get really excited," Price said.

U.S. auto sales are expected to rise 10 percent to over 11.5 million vehicles in 2010 after tumbling to a 27-year low last year. But most expect a still-tentative recovery in 2011.

"If the global economy is still uncertain it's going to make pricing of the IPO more difficult," said IPOdesktop.com President Francis Gaskins.

(Reporting by Soyoung Kim; additional reporting by Kevin Krolicki in Detroit, Clare Baldwin and Dena Aubin in New York)



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