U.S. still faces a big breakeven hurdle on GM stock
Taxpayers will have to wait a while yet to get back the money invested to keep General Motors out of the scrap yard. The Detroit carmaker is running far more smoothly thanks to its stint in bankruptcy last year—it earned as much as $2.1 billion in the three months to September, its third straight quarter of profits, according to preliminary results. But the terms of GM’s upcoming share sale show that, once public, the stock will have to as much as double before its biggest shareholder, the U.S. government, gets close to breaking even.
Assume GM’s initial public offering launches at $26, the bottom of the projected price range on the deal. That would mean the U.S. Treasury, which today holds 61 percent of GM, would be taking a 42 percent loss on any stock it sells in the offering. It is planning to sell 263 million shares, or around 28 percent of its holdings. If it does, to get back into the black on its investment GM shares would need to more than double, to above $52 a share, according to a Reuters Breakingviews analysis.
The hurdle for GM’s aftermarket performance lowers, of course, if GM’s bankers can issue the shares at the top of the price range of $29. But if the underwriters sell more of the Treasury’s stock in the IPO, say through the green-shoe, the barrier to breaking even goes up. The calculation is similar for the GM stakes held by the Canadian and Ontario governments.
Overall, this sounds like a tall order. All things being equal, it implies that GM will have to essentially double its profits from current levels. But it could have been worse. Had the Treasury insisted on dumping more of its shares on the market, as appeared to be the case over the summer, the IPO price might have been lower and the need for a massive increase in GM’s value afterwards far greater.
The U.S. Treasury, whose GM efforts are being led by Ron Bloom, a senior adviser to Secretary Tim Geithner, changed its tune and focused less on getting out quickly and more on exiting with minimal damage to taxpayers’ interests. That’s a sensible volte-face, but it still leaves getting back in black a ways off.