Good GM: The Largest IPO in U.S. History?

Includes: BGM, GM, GMS-OLD, RGM, XGM
by: Greg Weston

The most important GM bankruptcy news today is the new UAW agreement. The old proposal was UAW would get 39% of a post-restructuring GM, the USA 50%, bondholders 10%, old common shareholders 1%.

Now the UAW is agreeing to take only 17.5%, but in return for this smaller stake will be getting a variety of debt and warrants.

The question now arises who is getting (1) the 21.5% the UAW is giving up (or 19% if it exercises the warrant) (2) the 1% shareholders won't get in bankruptcy.

The New York Times reports today the government will be getting this equity, but the Wall Street Journal suggests that Obama is undecided.

There are several issues that may be troubling him about taking the largest stake for the Treasury rather than bondholders and other creditors. One is simply image: the U.S. government doesn't want to be a long term holder of GM equity, especially not the majority, because that's "socialism."

So that means Treasury will have to dump its equity in an IPO. Nor can the UAW retirement plans hold such a large chuck of their assets in one security because such concentrated positions would be a breach of the trustees' fiduciary duties, so they will be forced to sell their 17.5% as soon as they can, and probably most of the warrants and preferred stock as well.

Is there really a market for all that equity right now? Such an offering would likely be the largest in U.S. history. My guess described in my previous article was the new GM would have a market cap of $50 billion. The UAW's concession isn't too far off such a valuation, taking 19% to 21.5% less of the company up front but getting about $9 billion in other compensation suggesting a valuation of about $45 billion. In fact, I think my back-of-the-envelope calculation last weekend was pretty good!

So if basically everyone but the bondholders wants to get rid of their equity as soon as possible, and the new company will be worth roughly $50 billion, giving the bondholders only 10% would mean the IPO would have to be for $45 billion for them to cash out completely. Even if they only cash out half of their holdings, that's $22.5 billion, easily breaking $17.5 billion record set by Visa (NYSE:V), currently the largest IPO in US history. The distant #2 on the list of largest IPOs was AT&T Wireless (NYSE:T) at $10.6 billion. And those were both during equity bubbles.

The point here is that while the Treasury will inevitably end up with the lion’s share of the new GM, the larger the stake it seeks, the more headaches it will have, both from owning the majority of what was only a decade ago the largest corporation in the world, and from the other creditors, ranging from bondholders, to suppliers, to dealers. Who really wants all that GM stock so soon after it filed for bankruptcy and then screwed its stockholders, bondholders, retirees, and dealers?

A grand compromise may be in the works shortly after the filing, and even now what still seems like the worst case is bondholders ending up with 10% of the post-bankruptcy GM, a much sweeter deal than the recently offered 10% pre-bankruptcy GM. We may find a few weeks into bankruptcy the most practical thing concerned for all involved is to double the offer to 20%, which is horrible for those who bought these bonds years ago at face value, but a windfall for those who buy now.

Disclosure: Long BGM, GRM

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