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Rival Ford serves as bellwether for GM's upcoming stock offer

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Rival Ford serves as bellwether for GM's upcoming stock offer

November 1, 2010 - 12:01 am ET

DETROIT (Reuters) -- Ford Motor Co.'s emergence as Detroit's darling may have fueled jealousy at General Motors Co. headquarters, but the archrival's rising shares could help GM as it readies its landmark return to public markets.

As GM's only major U.S.-listed rival, Ford is the company investors and bankers are turning to as they debate the largest U.S. automaker's theoretical value ahead of the high stakes IPO scheduled for soon after next week's U.S. mid-term elections.

There are several ways to calculate value for GM, including using a multiple of its projected cash flow based on Ford's multiples, or doing an implied value calculation based on where GM bonds are trading.

Initially, GM's IPO -- just over a year after the automaker's bankruptcy -- was widely expected to weigh on Ford's shares, which have appreciated sharply since hitting a record $1.02 low in November 2008 and were trading around $12 when news of GM's stock float first began to circulate in May.

Ford executives were repeatedly asked to assess the risk that mutual funds and other institutional shareholders might "rebalance" their portfolios, dumping Ford stock and buying GM.

"Just mathematically, a lot of mutual funds and other investment entities will probably spread their investment out over the sector more," Ford Executive Chairman Bill Ford told reporters in August, two days after GM filed the initial paperwork for its IPO with the U.S. Securities and Exchange Commission.

Ford vs. GM comparisons

Whether GM benefits -- and Ford suffers -- from investors diversifying their autos holdings will not be determined until after GM's debut in mid-November. But in the meantime, Ford's share rally and a broad rebound in auto industry stocks across the board are helping GM's valuation.

Ford, which posted losses totaling $30 billion from 2006 through 2008, has emerged as the strongest of Detroit's "Big 3" automakers under a turnaround plan led by CEO Alan Mulally.

Its stock hit a six-month high of $14.47 on Tuesday when it impressed investors with a $1.7 billion profit for the third quarter.

The stock has also been bolstered this month by a series of upgrades, increased price targets and praise for management from analysts at six Wall Street firms, such as Morgan Stanley and JPMorgan Chase & Co.

All six of the banks are part of GM's IPO syndicate, which also includes UBS AG, Royal Bank of Canada, Citigroup Inc. and Bank of America Merrill Lynch. Analysts at the banks have held meetings since mid-October aimed at reaching a consensus on the market value of GM and setting a target price range and number of shares to sell in the IPO.

"It's nice to have benchmarks bubbling up and the general mood being very positive," said one person familiar with GM's preparations to go public. "There's a general level of interest and curiosity about whether there's been some fundamental change in the auto industry that makes it worth looking at again."

That person said that, while the analysts have largely been ahead of the market, results from companies such as Ford and major auto parts suppliers have been better than expected, supporting those forecasts.

Shares of Johnson Controls Inc., one of the world's biggest auto parts suppliers, are up nearly 30 percent this year. It posted a 50 percent rise in quarterly profit on Tuesday thanks to gains in auto production in the United States and Asia.

Market estimates

With a market capitalization of about $48 billion, Ford shares are now trading at 4 times its projected 2011 earnings before interest, tax, depreciation and amortization (a figure known as EBITDA) of about $12 billion, according to estimates by Thomson Reuters.

Based on a 2011 EBITDA projected in mid-August of $13 billion for GM by CRT Capital Group, GM could in theory command a market value of $52 billion, when applying Ford's multiple.

Bankers will also take into account the automaker's net cash position, stakes in its China joint ventures and auto parts supplier Delphi, and its recent $3.5 billion purchase of lender AmeriCredit among other factors.

When those are factored in, GM could have a market capitalization close to $70 billion, people familiar with the matter have said. The sources added GM's IPO valuation would likely come at a typical discount of 15 percent to 20 percent -- or maybe slightly more -- from $70 billion to reward IPO investors for taking a risk on a new issue.

Read more: http://www.autonews.com/apps/pbcs.dll/article?AID=/20101101/OEM/101039996/1424#ixzz148ZX5OlU

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