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IPO VIEW-GM is high-stakes bet for fund managers

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IPO VIEW-GM is high-stakes bet for fund managers

Fri Jul 2, 2010 1:39pm EDT

* GM pitching clean balance sheet, emerging market growth

* Investors wary of recent bankruptcy, brand image

* Bankers confident of $15-$20 billion IPO in fall 2010

By Soyoung Kim and Clare Baldwin

DETROIT/NEW YORK, July 2 (Reuters) - Like car dealers revving up for a sale, bankers have been spreading the word that the upcoming initial public offering of General Motors Co [GM.UL] will be a chance to scoop up a pre-owned automaker at an incredible price.

While fund managers are kicking the tires, few are ready to commit to buying on the spot.

As GM prepares for an IPO just a year after emerging from bankruptcy, at least one question has emerged: Will investors brave GM's tumultuous history and remaining risks to place yet another bet on the 102-year-old automaker?

GM and its bankers say the balance sheet magic of its U.S. government-funded bankruptcy has allowed the company to make money even at the trough of the highly cyclical auto industry.

That, combined with its top position in emerging markets like China, will present "massive economic opportunity" when the market recovers, Chief Executive Ed Whitacre told Wall Street analysts and investors this week in a daylong pitch for the IPO.

But fund managers say the new GM has a limited track record post-restructuring, and they want proof that it has slimmed down enough to ride out another potential slowdown in the economy.

"They probably need to post a few more quarters of profits to get investors really excited," said Mirko Mikelic, a fixed income portfolio manager at Fifth Third Bank in Grand Rapids, Michigan.

The financial benefits from GM's cost-cutting in bankruptcy were reflected in the first quarter, when the company surprised analysts with earnings of $865 million, its first quarterly profit in three years. From 2005 through the first quarter of 2009, the company's last quarter before bankruptcy, GM lost $88 billion.

The Obama administration's $50 billion bailout and restructuring saved the company but also earned GM the nickname "Government Motors" -- and tarnished the brand among consumers who still view it as a failed company.

"I don't know if it's the same level of vitriol that motorists have against stopping at a BP station, but my sense is that the general consensus is negative for the brand," said Jack Ablin, chief investment officer at Chicago-based Harris Private Bank, who helps oversee $55 billion.

"We're not going to jump into it. We like industrials in general and we do like the export theme, but I'm not a big believer in General Motors," Ablin said. "I'm not impressed with their history."


GM is expected to file plans as early as this month for one of the largest U.S. IPOs ever, a stock offering that would allow the government to step aside as the majority shareholder, people involved in the sale have said.

One of the sources said initial contact with investors has given GM greater confidence that the IPO could raise between $15 billion and $20 billion, at the higher end of the $10 billion to $20 billion range first projected by bankers.

GM is also in talks with banks to secure a $5 billion credit revolver to convince investors that it has the financial wherewithal to weather a potential double-dip recession and expand in global markets, one source said. [iD:nWEN6657]

"For GM, you would think everybody has to get in," a banker with knowledge of the plans said.

"It's not a question of demand, but it's really a pricing question," the source said, asking not to be named because he was not authorized to discuss the confidential plans.

GM stock could be a crucial way to diversify holdings in the U.S. auto sector, which is emerging from its worst downturn since the 1982 recession. Ford Motor Co (F.N) is the only major, publicly traded U.S. carmaker.

U.S. auto sales are projected to continue to grow in the next five years to a pre-recession level of 16 million vehicles by 2015. Sales tumbled to a 27-year low of 10.4 million vehicles in 2009 from 16.2 million just two years earlier.

Ford stock trades above $10 on the New York Stock Exchange, up more than tenfold since hitting a record low of $1.02 in November 2008 amid the recession. Shares of auto suppliers have rallied across the board over the past 12 months, with American Axle & Manufacturing (AXL.N) up 90 percent and Tenneco Inc (TEN.N) up nearly 80 percent.

Bankers see a better story in emerging markets.

GM's sales in China, the world's biggest auto market, surged 48.5 percent to 1.21 million vehicles in the first half, exceeding the company's U.S. sales for the first time. [iD:nTOE66106I]

GM has a 13 percent share in four key emerging markets -- China, Brazil, India and Russia -- which are expected to account for 45 percent of global sales growth through 2014, according to IHS Global Insight. Closest rival Volkswagen (VOWG_p.DE) has market share just under 10 percent.

"They are now selling more cars in the emerging world than they do here in the U.S., so it is somewhat of a leveraged play to the emerging economies," Harris Private Bank's Ablin said.

But GM must still overcome Wall Street skepticism surrounding its turbulent history, and fund managers caution that a "high profile" but "controversial" IPO will create increased scrutiny: It will be difficult to explain to investors if performance falls short.

"The market is really going to be looking for more confirmation that GM is actually able to take the restructuring horsepower and put that traction to the road in ongoing sales," said Dan Genter, chief investment officer at Los Angeles-based RNC Genter Capital Management, which has $3.2 billion under management.

"They've been in bankruptcy, and the fact of the matter is it's a turnaround. For it to be portrayed that they will become a darling of Wall Street is premature," Genter said. (Reporting by Soyoung Kim and Clare Baldwin; additional reporting by Philipp Halstrick in Frankfurt; editing by John Wallace)



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