GM $13 Billion IPO Reduces Treasury Stake

By: Mary Smith
11/04/2010 07:52 AM ET

General Motors has finalized terms for a stock offering of about $13 billion to repay a controversial taxpayer-funded bailout and reduce the 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.