GM's Profit Just One Step on Road to IPO

General Motors Co. Chief Financial Officer Chris Liddell said the automaker’s $865 million first- quarter net profit is a “good, useful step” on the way to an initial public offering that may come this year.

The largest U.S. automaker reported its first profit yesterday since the second quarter of 2007, aside from last year’s July 10 to September 30 period when it was recapitalized in its emergence from bankruptcy. GM said it generated $1 billion in free cash flow, while revenue rose 40 percent from a year earlier to $31.5 billion.

Liddell echoed Chief Executive Officer Ed Whitacre’s statement that GM may hold an IPO as soon as this year. GM will need to show continued profit and cash flow to prove to investors that the company is ready to resume public trading, Liddell said.

“This is a good, useful step on the road to the IPO,” Liddell told reporters yesterday. “I’d like to think the first quarter demonstrates we’re making good progress. Now that we’ve achieved profitability, the next step is to achieve sustainable profitability.”

GM still faces challenges including restructuring its Ruesselsheim, Germany-based Opel unit and a fragile global economic recovery, said analysts, who said the automaker needs to show it can repeat the first-quarter performance.

‘Baby Steps’

“These are good baby steps, but they still have a way to go,” said Mirko Mikelic, senior portfolio manager at Fifth Third Asset Management in Grand Rapids, Michigan. He helps manage about $18 billion, including debt of the finance company that was formerly part of the automaker.

GM is working to cut 8,000 jobs at Opel and reduce its capacity by 20 percent, Liddell said. Continued restructuring costs probably mean losses for the unit beyond the $506 million pretax first-quarter deficit, he said.

“Fixing Opel is like catching a falling knife,” said Joe Phillippi, president of AutoTrends Consulting in Short Hills, New Jersey. “You’re trying to restructure a company faced with a market that is soft and headed for turmoil.”

GM needs to maintain strength overseas, he said. GM earned $1.2 billion before interest and taxes in its Shanghai-based international operations, which do not include Europe.

If the Chinese economy slows down, GM may suffer, Phillippi said.

‘Strong’ in U.S.

With the U.S. market showing signs of a rebound, GM should be able to boost profit, said Jeremy Anwyl, CEO of Santa Monica, California-based car-shopping website Edmunds.com. GM made $1.2 billion in North America even though the U.S. economy is still weak, he said.

GM’s profit looks impressive considering that the U.S. auto market ran at an annual pace of 11 million vehicles in the quarter, Anwyl said. Annual U.S. sales averaged 16.8 million last decade through 2007.

“If they can make that kind of money in a terrible economy, how much could GM make in a market selling 14 million vehicles a year?” he said. “They could be minting money.”

Edmunds estimates that GM’s retail sales so far this month are up 8 percent from April. Toyota Motor Corp., by comparison, is down 15 percent, Edmunds said.

The company also has a stronger balance sheet than rival Ford Motor Co. After paying off the last of its total $8.4 billion in debt to the U.S., Canadian and Ontario governments, GM has a total of $18.2 billion in debt to its banks, the union’s health-care trust and in preferred stock to the government. Ford has $34.3 billion in automotive debt.

Treasury Stake

The Treasury still has $42 billion invested in GM. One aim of the IPO would be to allow taxpayers to secure a return. GM would need to have a total value of about $80 billion after dilution for the government to break even. The old GM’s market capitalization peaked around $53 billion in April 2000, according to Global Financial Data in Los Angeles.

The U.S. will probably sell its GM stock over “a few years,” Liddell said in a Bloomberg Television interview.

The U.S. Treasury is talking with banks including Greenhill & Co., Lazard Ltd. and Perella Weinberg Partners about advising the department on the company’s return to public trading, a person with direct knowledge of the matter said last week.

GM’s offering may be the second by a U.S. automaker this year. Tesla Motors Inc., the Palo Alto, California-based maker of electric sports cars that hasn’t posted a profit in six years, filed with the Securities and Exchange Commission in January to raise as much as $100 million in an IPO.

The biggest surge in U.S. stock-market volatility in two decades has battered IPOs this month. At least 16 offerings worldwide have been postponed or withdrawn, while American companies that have completed their deals have been forced to cut the size of their initial sales by as much as 70 percent, data compiled by Bloomberg show.

Liddell declined to put a firm date on an IPO.

“The IPO will happen when the market’s ready and when the company is ready,” he said on a conference call with analysts and reporters. “It could happen by the end of this year, that’s a possibility. It could happen next year, that’s a possibility as well.”

To contact the reporter on this story: David Welch in Southfield, Michigan, at dwelch12@bloomberg.net; Katie Merx in Southfield, Michigan, at kmerx@bloomberg.net.

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