GM IPO: It's Kind of a Big Deal

On Wednesday (the 17th), GM announced its IPO, priced at $33 a share, a bit higher than expected. It will turn the US government into a minority shareholder (as opposed to holding 61%), paying back billions of dollars to American taxpayers. Here's a rundown of the IPO from the WSJ:

After the market closed Wednesday, Wall Street underwriters set the price on 478 million common shares, with another 71.7 million expected to be sold if bankers exercise an overallotment option known as the green shoe.

The underwriters also boosted the size of a planned preferred stock offering to $4.4 billion, which could also be increased in the green shoe by another $650 million. If the decision is made in the next few days to exercise both overallotments, the deal could raise a total of $23.1 billion.

The deal grew in size over the past few weeks, driven by better-than-expected demand from U.S. mutual funds, according one person familiar with the deal.

Proceeds from the sale largely will go to the U.S. government, which owns 61% of GM after restructuring the car maker last year in bankruptcy court.

The auto maker has returned $9.5 billion of the $49.5 billion the U.S. spent to rescue GM last year. The Obama administration will seek to recoup the rest through the sale of stock over the next couple of years.

Dennis Berman and Simon Constable discuss how GM's underwriters achieved a high opening price for GM's IPO, an effort that will help to return billions of dollars of taxpayer bailout money to the U.S. Treasury.

The U.S. Treasury, which has kept close tabs GM's operations since bailing out the auto maker last year, will reduce its oversight role after initial public offering on Thursday, people familiar with the matter said.

This is great news for everyone involved in my view. After the IPO, the US taxpayers will have about 2/5ths of their bailout money repayed. GM will have an infusion of capital, in conjunction with the federal government's role in oversight reduced.

How about the investors? What does GM going public again mean for them?

James B Stewart, writing for Smart Money, has this to day:

Along with other automakers, GM should benefit from cyclical trends in its favor. After the recent financial crisis and severe recession, there’s tremendous pent-up demand. An improving economy, higher employment and rising consumer confidence should translate into solid growth in North America, and GM should fare even better in emerging markets (in which it has the largest market share).

So let’s concede this is a good time to be buying auto company shares, and that GM in particular seems an attractive candidate for further market share gains. How do the numbers look?

Price-to-earnings math gets tricky, because quarterly earnings have been erratic for car makers over the past year. If we assume the most recent quarter is representative of quarters to come, GM trades at 5.1 times earnings compared with 8.5 for Ford at 8.5, 26.8 for Toyota and 10.2 for Honda. In other words, GM still looks cheap.

This may in part reflect the political and business reality that this is an initial public offering that can’t afford to flop. A successful offering is essential to GM’s campaign to shed its old stodgy, loser image and shed the taint of government ownership. And the government (which doesn’t seem to be meddling in day-to-day management but remains the largest shareholder) needs a successful offering to enhance its prospects of recouping the massive taxpayer investment.

Of course there are risks, as in all IPOs. There’s a list of them in the GM registration statement. While I’m encouraged by GM’s progress, I believe it still has a long way to go before it achieves its vision of building the world’s best cars. Based on my last visit to the auto show, I’d say its new product line up doesn’t yet match Ford’s. But it has plenty of new vehicles in the pipeline, including the much-anticipated Volt.

So my advice is, call your broker and ask if you can get some shares. (Thirty-five underwriters are participating in the offering.) I intend to. Demand seems to be running high, and if my analysis is any indication, it’s no wonder: Within the stated offering range, GM shares are a great deal.

Another writer for Smart Money, Alyssa Abkowitz, adds more to the case for buying GM:

Does GM really deserve the flashy IPO parade? On paper, the reengineered automaker boasts a phenomenal balance sheet, with strong cash flow, and a conservative price-to-earnings valuation, even after the pre-IPO bump. In the third quarter, the company posted earnings of $2 billion on sales of $34 billion – its biggest profit in more than a decade. Analysts note that better pricing has helped the company’s profits; the new Buick LaCrosse, for example, sells for about $7,800 more per unit compared to last year. “Simply put, GM makes products that consumers are willing to pay more for than they once did,” notes David Whiston, an auto analyst at Morningstar. GM also has a strong presence in China and other emerging markets where auto demand is growing. That’s one reason, says Schuster, that “there’s good reason to believe the company will outperform.”

If results from its primary rival, Ford (F: 16.68, +0.17, +1.02%), are any indication, GM’s shares could thrive. Ford is on track to post its first consecutive annual profit increases since 1993 – all while being celebrated in the media for avoiding bankruptcy and a bailout. “Ford is trading really well,” says Matt Therian, an analyst at IPO research firm Renaissance Capital; its shares are up by 60% since mid-summer. But by some measures, GM is actually performing better than Ford: in the third quarter, for example, Ford earned about $2,700 in profits per vehicle it sold in North America, while GM earned around $3,000 for each vehicle.

Of course, there are still plenty of reasons for investors to be skeptical. For one, GM’s common stock investors won’t see dividends for a long time. That’s because the government has to get more of its $49 billion investment back from GM before any penny goes elsewhere. While the company has crept into the black, its sales are still far below their pre-wipeout peaks. There’s also the question of how long the “Government Motors” stigma will hang over the company and whether the auto giant’s financial restructuring has addressed all its issues, including its continuing obligations to retirees. “Investors will remember the problems of the old GM,” Therian says, and that could weigh down the stock price.

It seems to me that the benefits outway the costs. Anyone who wants to invest in the auto industry MUST give GM a long look. Auto sales are starting to rebound, so now is a great time to buy.

For more on auto industry investing, here's a great piece by Jonathan Hoenig:

http://www.smartmoney.com/investing/stocks/fords-a-great-story-but-hondas-the-better-stock/