U.S. bailed-out automaker General Motors (GM), aided by a strong second-quarter performance, is planning to file for an initial public offering (IPO) as early as Friday, which will enable it to repay a part of $50 billion taxpayers' money that it received during the government-sponsored bailout last year.
GM reported its best ever quarterly profit Thursday, saying its second-quarter net profit was $1.3 billion. In the year-ago period, the automaker had lost nearly $13 billion as it slipped into bankruptcy and received $50 billion in government bailout funds.
In April, GM repaid $6.7 billion in Treasury Department loans, but the remaining loan package still gives the government a 60.8 percent stake in the automaker. Other GM owners are the UAW's retiree health-care trust (17.5 percent), the governments of Canada and Ontario (11.7 percent), and bondholders of the old General Motors (10 percent).
Last week, GM CEO Edward Whitacre Jr. had said the company is keen on separating itself from government ownership as it does not like "this label of Government Motors."
Whitacre had said the label is hurting the image of its products with consumers, and as it recovers, it will try to emerge from the government's shadow.
"We don't like this label of Government Motors. We want to get away from that. It turns off customers. People at G.M. are embarrassed by that," Whitacre had said. "We want the government out. Period."
Ever since GM received $50 billion bailout money, it went through a painful restructuring process that included cutting costs and streamlining its operations.
The company implemented painful cost-cutting measures that included closing 14 factories and shedding more than 65,000 jobs in the U.S. The company now employs 205,000 people across the globe, including 77,000 in the U.S.
The automaker sold Sweden's Saab to Spyker Cars of the Netherlands and disposed off other brands like Hummer, Saturn, and Pontiac.
The company also reduced its U.S. dealership network by 25 percent to 4500.
But at the same time, GM continued to deliver strong products through its existing core brands (Chevrolet, Buick, GMC, and Cadillac). In July 2010, the automaker's sale of its core brands surged 24.6 percent year-on-year to 199,432 units, driven by strong sales of new and redesigned models like the Chevrolet Equinox wagon and Buick LaCrosse sedan. The company also managed to pique the interest of consumers with new releases such as it first plug-in hybrid vehicle, the Chevrolet Volt.
GM vehicles also fetched higher price-according to car shopping site Edmunds.com; in the second quarter, consumers paid, on average, $32,584 for a GM car or truck, up 5 percent from the year-ago period, and up 1.4 percent sequentially.
The company also maintained cost discipline and implemented strategic initiatives such as reinventing its European business unit and buying subprime auto lending giant AmeriCredit Corp. last month. The latter was seen as a move to fill the vacuum left in 2006 when the automaker gave up its controlling interest in the captive financing unit GMAC.
GM, which has recorded losses from 2005 through 2009, swung to profit for the first time in the first quarter of the current fiscal year. It earned $865 million, and in the second quarter, it performed even better, reporting a net profit of $1.3 billion.
The automaker also beefed up its cash reserves during the second quarter, indicating an improvement in its finances. GM said cash flow from operations, excluding capital expenditures, stood at $2.8 billion in the second quarter. The automaker ended the period with $32.5 billion in cash and marketable securities.
GM also has reportedly secured a $5 billion credit facility from several banks, including JPMorgan Chase and Morgan Stanley, which clears the way for its much-awaited IPO. The revolving credit facility is meant to offer GM a financial cushion in case its recovery plans hit a snag.
"Going public will enable the company to invest in designing, building and selling the world's best vehicles, attract the best people and access the capital markets. One of the most important measures in establishing the foundation for going public is the company's ability to return to sustainable profitability," GM had said last year after resorting to bankruptcy protection.
"I am pleased with our progress on achieving our business objectives," GM CFO Christopher Liddell said in a statement Thursday. "We have delivered strong products, maintained cost discipline, progressed strategic initiatives such as restructuring Europe and acquiring AmeriCredit, and delivered two consecutive quarters of profitability and positive cash flow."
In other words, GM is all set to go public once again.
According to a source close to the development, GM could file for the IPO as early as Friday or next Monday. The source said that GM has already submitted a filing with the Securities and Exchange Commission (SEC) earlier this week on the rules that would govern its board and shareholder meetings as a public company, thereby setting the stage for the IPO.
Though the price band of the IPO and how many shares GM will sell are unclear, the source said most of the shares offered would come from the U.S. Treasury.
The source also said the company is seeking to raise anything between $12 billion to $16 billion.
If that's true, then GM's IPO will be the second biggest in U.S. history, after Visa Inc.'s 2008 IPO of $19.7 billion.
The actual offering is not expected until November or later, the source said.
Meanwhile, market analysts warn that the automaker continues to face challenges ahead.
For instance, GM continues to rely heavily on sales to car rental agencies and government and corporate houses, which are less profitable than sales to individual customers. Retail sales -- or sales to individuals -- were up 11 percent industry-wide in 2010 through June, but were up only 1 percent at GM.
GM also had the highest incentive spending of any major automaker at $3,691 per vehicle, almost $1,000 more than the industry average, according to Edmunds.com.
The automaker's market share globally has also fallen. GM controlled 15.4 percent of the U.S. market for cars versus 17.5 percent in the second quarter of last year. Elsewhere, its market share has also dwindled.
The automaker also faces the challenge of drawing investment banks for participating in the IPO. That is because underwriting fees in GM's IPO may be less than the typical IPO because of the government's involvement.
And last but not least, GM's vehicles have fared poorly when stacked up against fuel-efficient Japanese counterparts. Typically, vehicles made by U.S. automakers are billed as "gas guzzlers," a label that has driven cost-conscious consumers to buy Japanese vehicles that are fuel-efficient.
Even when it comes to making low-emission or environmental-friendly vehicles, U.S. automakers lag their Japanese counterparts. For instance, Toyota's (NYSE: TM) popular Prius Hybrid and Honda's (NYSE: HMC) Accord and Civic Hybrids are already selling in the U.S. In comparison, GM's Chevrolet Volt, which is the first hybrid ever by a U.S. automaker, will be launched later this year.
"GM needs to be very careful about when to conduct the IPO," said Tokyo-based Fukoku Capital Management's CEO Yuuki Sakurai. "Can they convince investors to buy shares when spending is dropping in the U.S. and they don't have leading-edge environmental technology?"
GM, Sukurai said, must disclose risk factors and uncertainties related to its operations and the global economy.
GM's IPO, Sukurai added, also comes amid a volatile investment climate, churned by fears of a slowing economic growth worldwide, including China, where GM sells 25 percent of its vehicles.
However, Birmingham-based investment banking firm Amherst Partners LOC's managing director Chas Chandler said he's confident that GM's IPO will do well.
According to Chandler, the outlook for the auto industry is good and it makes sense for GM to file for an IPO as automakers and suppliers need working capital to survive.
"The prospects for our Detroit Three (automakers) are as good as they have been in the last 24 months or more," he said.
Agrees New York-based Gimme Credit analyst Shelly Lombard. According to Lombard, one needs to "get the money when the market is giving it."
"Now is the time for GM to do an IPO," the analyst said.
Will the IPO be a success? Only time will tell.
Neither GM nor the U.S. government commented on whether the automaker will file the IPO soon.
International Business Times, The Global Business News Leader
