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Whitacre Seeks ‘Bigger, Bolder’ GM IPO as 32 Offerings Shelved

General Motors Chairman and CEO Ed Whitacre
General Motors Chairman and CEO Ed Whitacre pauses at the Treasury in Washington. Photographer: Andrew Harrer/Bloomberg

Ed Whitacre has General Motors Co. in better shape now than it’s been in years. Pushing ahead with an initial public offering this year may be tougher to manage.

Bonds that convert into GM shares fell at the end of last week to their lowest level since Feb. 26. GM, which earned $865 million in the first quarter, is still losing money at its European unit. Chief Executive Officer Whitacre has less than four months to meet a goal of setting up a lending division. The IPO market has stumbled, with 32 deals pulled since April.

Whitacre has said he’d like to begin selling shares as soon as possible. The former AT&T Inc. chairman will need to balance his natural inclination to seek a big IPO against the need to make it successful for the government, which owns 61 percent of the automaker, said James Kahan, a former AT&T executive.

“Ed does things that are bolder and bigger rather than small and timid,” said Kahan, who said he hasn’t discussed the size of the IPO with Whitacre. “All things being equal, Ed would like it bigger versus small. But all things aren’t equal. He needs to get the government the best value for its stake, too.”

The Obama administration needs GM to go public to reduce its 61 percent stake and harvest returns on its $50 billion investment. Morgan Stanley and JPMorgan Chase & Co. are expected to lead the initial sale, people familiar with the matter said last week, and a June selection means Detroit-based GM may be able to sell shares in the fourth quarter.

Selim Bingol, a GM spokesman, declined to comment.

‘Only Way’

“This is the only way GM is going to be able to get out of government ownership,” said Rebecca Lindland, a forecaster at IHS Global Insight in Lexington, Massachusetts. “The company is in significantly better shape than it has been in a long time.”

At least five investment banks competed to handle the sale, which may be worth as much as $12 billion, making it the second-largest in a decade. Morgan Stanley and JPMorgan, both based in New York, would be responsible for writing the prospectus and promoting the shares to potential investors, said two people who asked not to be identified because the decision isn’t final.

A successful IPO may be the biggest challenge so far for Whitacre, who as chairman also led the board that ousted Fritz Henderson from the CEO job in December. He’s reassigned a majority of top executives and is pushing for a return to profitability.

Not Too Big

GM’s sale will come after at least 32 companies worldwide postponed or withdrew initial offerings since the start of May, data compiled by Bloomberg show. IPOs have dried up as concern that the European debt crisis is spreading beyond Greece and slower-than-estimated U.S. jobs growth in May helped push the Standard & Poor’s 500 Index down 10 percent from its 2010 high on April 23.

“Can the market absorb a multibillion deal of General Motors? Yeah, in a heartbeat,” said William Smith, president of Smith Asset Management in New York, who used to own shares of GM. “It’s General Motors. The question then becomes is it valuable and is it worth buying on the IPO?”

Since 1999, four U.S. IPOs have exceeded $5 billion -- Visa Inc.’s $19.7 billion deal in 2008, AT&T Wireless Group’s $10.6 billion offering in 2000, Kraft Foods Inc.’s $8.68 billion deal in 2001 and United Parcel Service Inc.’s $5.47 billion sale in 1999, according to data compiled by Bloomberg.

The banks want to sell about half of the government stake to the 20 top institutional investors, said one person familiar with the plans. The largest institutional investors include Vanguard Group Inc. and Fidelity Investments.

‘Patriotic Responsibility’

“I’d almost feel a patriotic responsibility to look at it,” said Jim Porter, founder of Hinsdale, Illinois-based New Century Capital Management LLC. “It’s certainly more streamlined and a lot more interesting than it ever has been in the past.”

GM is losing money in Europe after Whitacre and the board overruled an agreement Henderson negotiated to sell a majority of the Opel unit to a group led by Magna International Inc. GM reported a loss of $500 million before interest and taxes in Europe in the first quarter, in contrast to a $1.2 billion profit in North America.

Also, U.S. auto sales to retail customers fell in May as sales to so-called fleet customers buoyed an annual sales rate of 11.6 million cars and trucks, Brian Johnson, a Barclays Capital analyst, wrote in a June 8 report. GM’s 38 percent of sales from fleet, which is less profitable than retail, was the second highest monthly percentage on record, he said.

‘Excellent’ Potential

“GM’s earnings potential is excellent because it finally has a healthy North American unit and can focus its marketing efforts on just four brands instead of eight,” David Whiston, an analyst at Morningstar Investment Services Inc. in Chicago, said in a June 7 report.

Chief Financial Officer Chris Liddell’s comments on the first quarter earnings call imply that GM’s North American unit will break even at a U.S. light-vehicle level of around 11 million units, Whiston said in the report.

“We think the normative demand for U.S. light-vehicles is 14-16 million units so we expect GM to be printing money as vehicle demand comes back over the next few years,” he said.

Whitacre also wants the company to have an automotive-lending unit before going public, people familiar with the plan have said. GM hasn’t had such a subsidiary since former CEO Rick Wagoner sold 51 percent of GMAC to private-equity firm Cerberus Capital Management LP in 2006.

Timing Factors

The timing of the offering will depend on GM’s profitability, the health of the economy and the state of capital markets, three people familiar with the matter said last week. The size of the stock sale hasn’t been determined yet, said one person familiar with the plan.

The sale may raise as much as $12 billion, an estimate by Independent International Investment Research Plc showed.

GM’s equity is worth $70 billion, according to a May 20 report by Eric Selle, a JPMorgan debt analyst who projects a return of 47 cents on the dollar for holders of bonds issued by GM’s predecessor, General Motors Corp., that will be converted to stock and warrants in new GM. At June 11 bond prices, GM’s implied equity value is about $45 billion.

The 8.375 percent notes due in 2033 declined 1.5 cents to 30.25 cents on the dollar June 11 in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. That represents a 22 percent decline from the April 30 peak of 38.81 cents, according to Trace.

U.S. Stake

For the Treasury to break even, the value of GM would need to rise to about $80 billion after bondholders and the UAW’s health-care trust exercise stock warrants that dilute the U.S. ownership.

The U.S. government’s current net investment in the automaker is $42.2 billion, according to a senior official in President Barack Obama’s administration. GM has repaid $6.7 billion in loans and paid $600 million in interest and dividends. The U.S. also holds $2.1 billion in the company’s preferred shares.

“The pun is GM is not in the driver’s seat,” said Michael Holland, who oversees more than $4 billion as chairman of Holland & Co. in New York. “The Treasury’s in the driver’s seat. There’s no doubt who the decision makers are.”

The government has hired Lazard Ltd. for $500,000 a month to advise on selling its stake, according to a document on the department’s website. Evercore Partners Inc. also is advising GM on the selection, a person familiar with the matter said.

Setting Fees

The Treasury said June 10 that it will determine the underwriters’ fees. The fees will be 0.75 percent, according to a person briefed on the matter. That would be less than any U.S. IPO over $5 billion since 1999, Bloomberg data show.

“The underwriters are going to view GM as a client they’re going to have over time,” said Paul Bard, director of research at Greenwich, Connecticut-based Renaissance Capital LLC, which has studied IPOs since 1991. “This isn’t just one transaction. To an investment bank, GM represents a number of transactions.”

Choosing a lead underwriter now allows GM to file an S-1 initial registration form as soon as July and sell shares in October or November, a person familiar with the matter said.

“There’ll be such a close watch on this IPO,” said Steven M. Rogé, a Bohemia, New York-based manager at R.W. Rogé & Co., which oversees $200 million. “It won’t just be financial, it’ll be political. It might even be more political than financial.”

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