General Motors on Wednesday finalized terms for a stock offering of about $13 billion to repay a controversial taxpayer-funded bailout and reduce the U.S. Treasury to a minority shareholder.
GM's filing with the U.S. Securities and Exchange Commission is the final step before it begins marketing what is expected to be one of the largest-ever IPOs. The investors are expected to span the globe and include sovereign wealth funds.
The automaker plans to sell 365 million common shares at $26 to $29 each, raising about $10 billion at the midpoint, according to updated initial public offering papers filed with the SEC.
In addition, GM said it planned to sell about $3 billion of preferred shares that would convert to common shares under mandatory provisions, a less risky form of equity that could attract dividend and growth-fund investors.
The IPO would value GM at just over $41 billion at the midpoint of the price range. Assuming exercise of warrants that are in-the-money, the share count jumps roughly 300 million to 1.8 billion and GM's value rises to just under $49 billion.
It is all but certain that U.S. taxpayers would face a loss on the automaker's still controversial bailout. GM needs a market value of roughly $70 billion if U.S. taxpayers are to break even.
By comparison, GM's more successful but smaller rival Ford Motor Co is currently worth about $49 billion.
"That would make sense," said Bernie McGinn, chief investment officer at McGinn Investment Management in Alexandria, Virginia, who owns Ford stock. "Ford has done everything right, and GM is a year out of bankruptcy and it has a new CEO."
McGinn said the discounted value for GM also reflected the urgency for the Obama administration to exit its investment in the U.S. automaker.
"I think this is a political thing. It's being driven by Washington," he said. "They just want to get out. And if you talk about eating $10 billion in losses, this is a city that can eat trillions of dollars."
One source familiar with the offering said, "(The Treasury) decided they wanted a massive upside." The source was not authorized to speak with the media and declined to be named.
"The tough actions that the Administration took to get the auto industry back on its feet and save over one million jobs played a crucial role in putting our economy on the path to recovery," the U.S. Treasury said in a statement.
"Today's development represents another important step forward in our oft-repeated policy of exiting these investments as soon as practicable and recovering funds on behalf of the American taxpayer."
GM, which will have 1.5 billion outstanding common shares following a planned 3-for-1 stock split in the IPO, would need to trade at roughly $50 per share in the market to reach the $70 billion break-even threshold.
The Treasury, which holds a 60.8 percent stake in GM as a result of its $50 billion bailout, will take a loss of up to $4.9 billion on its sale of shares in the IPO.
The Treasury plans to cut its stake to just over 43 percent, excluding the overallotment option.
Treasury officials led by former Lazard Freres and Co banker Ron Bloom have indicated that they are willing to take an initial loss on GM as part of the Obama administration's stated goal of exiting from the government's investment as "quickly as practicable."
Underscoring the political sensitivities still surrounding GM's bailout, Senator Chuck Grassley in a statement on Wednesday urged the Treasury to ensure "taxpayers get their money in full."
Some analysts said a rally in GM shares -- and a stronger recovery in global auto sales -- could still bring the U.S. taxpayer-funded investment closer to break-even.
"It's only the starting point," IHS Automotive analyst Aaron Bragman said of the initial valuation of GM and the paper loss for Treasury. "GM knew it was not going to get it all back at once."
GM shares would have to gain over 80 percent after the IPO, assuming a 1.5 billion share count, to allow the U.S. government to break even on its investment before accounting for banking fees. By comparison, shares in Ford have gained 52 percent this year.
GM executives say the company's restructuring through its 2009 bankruptcy has allowed the company to break even at around 11 million in annual U.S. auto sales -- a figure close to the near 30-year lows that the industry saw in 2009.
U.S. auto sales are expected to rise to about 11.5 million this year from 10.4 million last year, and are widely expected to recover to the pre-recession level of more than 15 million units within the next few years.
GM, the top U.S. automaker by sales, said earlier on Wednesday that it expected third-quarter earnings of $2.1 billion and that it would turn a "solid" profit for the full 2010 year.
Biggest IPO since VISA
If everything goes as planned, the offering would be the largest U.S. IPO since Visa Inc's $19.7 billion IPO in 2008.
GM's underwriters could sell an additional 54.75 million common shares and 9 million preferred shares if the IPO attracts robust investor demand, raising another roughly $2 billion and potentially taking the total IPO amount to as much as $15.65 billion, the company said in the amended prospectus.
GM will use some charter flights for its executives on its visits to prospective investors over the next two weeks, GM said on Wednesday.
GM and its U.S.-based rivals Chrysler and Ford sparked public outrage two years ago when executives flew to Washington on chartered jets to ask the federal government for money.
Once a blue-chip stock, GM is expected to return to the New York Stock Exchange under the "GM" ticker symbol as well as a listing on the Toronto Stock Exchange. GM is expected to price its IPO on Nov. 17 and begin trading on Nov. 18, sources said.
The governments of Canada and Ontario plan to sell down their combined stake to 9.64 percent from 11.67 percent and the United Auto Workers VEBA trust is expected to reduce its stake to 15.33 percent from 19.93 percent.
GM plans to contribute $4 billion cash and $2 billion of common stock to its pensions after the IPO to address an area of investor concern.
Morgan Stanley, JPMorgan, Bank of America Merrill Lynch and Citi are leading the underwriters on the offering. UBS, which was listed as an underwriter as recently as GM's last S-1 filing on Oct. 29 was not listed in Wednesday's filing. It was not immediately clear why UBS is no longer part of the syndicate and UBS declined comment.