Thursday, 30 September 2010

Company Focus – General Motors – How the NOMAD MEN will be Targeting Additional Buyers for the IPO Roadshow

Recent press releases at long last demonstrate that fact that the US Treasury must temper its ambitions regards the innate sale value of GM's first IPO tranch. Intended to raise between $10-20bn, recent murmurings highlight that the figure could be lower.

The standard below-par offer sits at between -5% to -8% the nominal face-value of a released stock, so as to try and ensure the 'early-bird' investors see a positive short-term gain. At extremes, there are reported views that GM's stock may have to be presented at up to -30% face-value.

Such an event would make a mockery of the floatation, and has set-off alarm bells for the UAW trustees and Canadian government, who would rather release their respective portions when improved market conditions assure recoup of original respective 'debt-swap' and 'bail-out' expenditures.

Thus the US Treasury would be the only seller, and itself caught between a rock and a hard place, between being seen to recapture a portion of the tax-payer funded $61bn GM package and the possibility of seeing proportionate value-destruction.

That $61bn sum of course does not include the additional costs actually incurred by the process of Chapter 11 administrative filing and expected fees in marketing and finalising the IPO. Some say that figure, added to the original $61bn, reaches near $70bn all told. The natural method for pricing is to compare with domestic sector competitors, with Ford really as the only comparable benchmark.

The debt-laden but operationally profitable Ford is worth approximately $40bn market capitalisation, hoping to combat recent and ongoing input cost and consumer demand headwinds by actually reducing its range (as seen with the retraction of the 'thinner margin' Ranger pick-up from the NA market).

[NB Chrysler is not referenced given its operational integration/protection by FIAT, and the inability to clearly assess a standalone enterprise, even if early official reports state it as being profitable].

Thus, this essentially direct comparison of two US multi-national automakers, set against the global sea of Eastern players - is the current bug-bear of the markets in identifying a fair value for GM.

GM's nominated advisors (its NomAds) will have scoured the global investment community to identity the most likely candidates for near assured sale: the FT reporting of 10 book-runners and under-writers. Although the usual suspects of large institutionals are the first port of call, other non-traditional may well have been approached given the limited level of risk-exposure all large investment bodies presently seek; with the underwriters themselves possibly re-insuring themselves against a possible 'hit' of unsold stock..

A general view indicates that with so many fund managers seeking a mix of western risk-free buys (typically in bonds and revolved defensive stocks) married to still buoyant EM stocks, in-house pressures to maintain stability and growth of their portfolios indicates that longer-shot buys will largely remain on the shelf. And presently, GM could be seen by some as such a long-shot.

In recognising the 'perspective dependent' volatility of GM's value, the interest of the shrunken but hard-fighting hedge-fund sector may take, could also be problematic. With the macro-global outlook stance increasingly tepid on the expectation of China's 'soft-landing' and still fragile US consumer confidence, undermined by underpar jobs data , the hedge-fund attitude may well be negative. Those bigger players with market-fire-power could well seeking to short the stock, so positioning themselves for a latter 'buy-in' after what could be a number of rolled-over shorts, and so marked stock price decline.

Hence, with the risk-averse major institutionals weary (perhaps only taking the smallest floatation slice for political reasons) and hedge-funds possibly predatory, the NomAds will probably be targeting other buyer types:

1. Global Sovereign Wealth Funds
2. 'Bailed-Out' US Institutionals
3. US Governmental Pension Scheme Agency Funds
4. US Municipal Investment Funds
5. Foreign Auto Companies (ie Chinese & S.Korean)
6. Private Equity

Given their intrinsically long-time horizons and roles as facilitators of international diplomacy, sovereign wealth funds have a major part to play as IPO facilitators. The US could feasibly use its separate Treasury interests in GM to 'borrow from Peter to pay Paul' but such a ploy – even if indeed tenable - would obvious only serve to send the message out to the broader market that the GM entity was essentially a dubious running concern, and create a 'field-day' for political and financial journalists. Instead the far more buoyant pots of Asian, Middle Eastern and South American SWFs are undoubtedly seen as the prime candidates for taking long positions on GM, with the ability to stand any minor early period stock shocks that could come about. Equally, although well entrenched operationally within EM regions, GM is still seen as a local industrial and economic facilitator, part of the 'driving mechanism' to advance infrastructure and standards of living. Hence, these are seen by investment-auto-motives as the prime candidates from the NomAd viewpoint.

Whilst the more secure, risk-averse private and publicly held institutionals in pensions and insurance realms may baulk at the GM offering, certain enterprises – namely those themselves bailed-out by the US government during the financial crisis – may be expected to participate as buyers, even if not 'corner-stone buyers'. The most obvious is AIG, into which the US Treasury pumped a reported $182bn to stem its losses and restructure the company. The US Treasury is about to transfer its holding of preferred stock worth $49.1bn to 1.66bn common stock shares to itself recoup its 'public good investment'. But whilst AIG is naturally seeking to divest of non-core assets – including an auto-insurance company, there could well be quiet whispers from Washington that seek it to take-up a stake in GM; especially so since it is the only insurer not to have repaid its TARP monies (Hartford and Lincoln having done so). Not quite a case of borrowing from Peter to pay Paul, but in reality not too far off.

The third candidate is the varied group of Pension Funds run at Federal and State levels that seek to secure the retirement futures of government employees. Separated from Municipal bodies to avoid conflicts of interest regards a state's balance sheet, they have acted much as mini-SWFs, with a vested interest in 'hard'/'soft' national infrastructure aswell as down-the-line earnings to satiate the increasing demand-level from retirees. These economically aligned funds are obvious participants in the GM offering. Under the 1932 inaugurated State Employees Retirement System ('SERS' latterly 'PERS'). 'CALPERS' is perhaps the best known, today representing the retirement interests of California's public workers, and seen to be the most activist. Whilst the one of the largest funds there may take some convincing of the patriotic good in backing GM, since beyond its own activism toward GM in 1992 regard corporate governance, California has historically been the home of various auto-companies design, R&D and divisional HQs, but much of GM's activity (besides retail) takes place outside of CA: in Michigan, the mid-west, and now southern states. Also California's recent 'sponsorship' of alternative energy vehicles including companies such as Tesla Motor could lead to Board-level conflict when pursuing the national and state agendas. (Any vested interests by board members or influential state persons should be identified). However, given the importance of the GM IPO to the US, such frictions would be expected to be overcome, ideally without word from Washington, and as part of the balanced stock-price identification mechanism.

Municipal Investment Funds and State Investment Funds have obviously been set-up for the good of the region, state and so in turn the nation*. Wisely separated from Governor access, like PERS, these regional funds have the similar remit to act as mini-SWFs, with dual goals of providing both additional short-term operating cashflow (thereby assisting beyond immediate tax revenues and budget spend) aswell as longer-term capital cushion buoyancy. Given the poor state of many State finances, these investment funds have gained greater visibility in recent years, both in terms of risk exposure – given the CDO debacle – and general governance.
[*This remit stands in stark contrast to the massive over-leveraging of the PSBR many US states have undertaken. Whilst historically conservative states like Nebraska, Texas and Virginia have constrained spending and so debt, other like California and Michigan weigh-down the nation. leaving their own credit standing - and possibly that of the whole US nation's - as near perilous, with ramifications for the dollar – something China undoubtedly sees with resistance to its own Rm rise; an issue GM itself must address given the repatriation effect of Rm:$].
However, Municipal and State-level investment funds have a major role to play determining the success of the GM floatation, yet whilst acting as floatation catalysts will also recognise the onus on themselves as foundations of regional balance sheet wealth creation, thus have an impetus not to overpay, so again actors in the stock-price determination mechanism. Interesting to watch will be the actions of intermediaries such as the New Jersey State Investment Council, the likes of which may have to pursue (simplistically) split investment attitudes between homeland offerings such as GM and more international opportunities via PE firms such as TPG on its roster.

Foreign automotive companies are also an obvious possibility, seeing the opportunity to gain a new or greater foot-hold in North America via (symbolic or otherwise) ownership of GM stock. Such a move would also provide a basis for technical co-operation and expansion between GM and other interested VMs. To this end, two Asian countries hold the greatest appeal: China and S.Korea.
Along with Chrysler, GM was one of the first 'foreign enablers' for China in the early 1980s, its initial arms-length co-operation evolving into the biggest JV entity via GM-SAIC (Shanghai-GM offering Cadillac, Buick & Chevrolet), with more recent stake in Wuling mini-vans to broaden its own product coverage and critically ingratiate itself with an important economy-driving segment. Thus continues to play a major role in US-Sino relations; even if the HUMMER deal was canceled.
After 3 decades of such focus, given the changing economic/financial world order, it seems only natural that the PRC itself seek to put a portion of its massive foreign reserve dollar holdings to work, thereby gaining greater corporate, technical and political co-operative standing with the US, and simultaneously reducing the dollar's strength via FX flows which in turn provides a short term buying opportunity in US$ based assets (and equally $ pegged assets) aswell as the impetus to reduce its own internal cost base for later resumption of higher-value exported goods and services.
Thus just as the US has bought into China, so we seem to have come to the point where China buys into the US.
A second possibility is one, two or even three S.Korea auto-companies: namely Hyundai-Kia, Samsung and Ssangyong. Hyundai is of course well known in the US with its own manufacturing plants, but its CEO's public ambition is to grow massively to become ultimately the No3 maker. Assisting this effort, Hyundai procured a brokerage house some time ago to (although not explicitly stated) serve its own periodic buy-back ambitions, assist its own equity financing methods, and provide less conspicuous buy into other domestic and foreign companies through-out the automotive value chain. Thus with such ambitions, the piggy-backing of GM – through its IPO - could be a strategic option.
Samsung is the lesser known player outside of S.Korea, and sits as a sub-division of Renault-Nissan. Carlos Ghosn recognises the need to expand R-N's coverage of the USA and Canada, given that Nissan is the sole representative and could do with an underling to fend-off Hyundai-Kia et al. Given Samsung's export entry into South America has proceeded seemingly slowly but well, the notion could well be to position Samsung as the American Dacia, serving both South, Central and North America with affordable vehicles. This would counter its homeland position as near-premium, but allows for R-N's global expansion. Thus Samsung could through a third party take a small slice of the IPO offering to secure its place, in time growing its holding to become a latter-day operational associate with GM.
Ssangyong, the previous purveyor of exported SUVs with Daimler engines, has had injections of Chinese funds via SAIC's partial ownership, and access to low-cost components so as to maintain an element of modernity about the products and the company. Although notionally S.Korean,it could feasibly serve as China's entry vehicle into world markets as SAIC grows its ownership of the firm which at least has brand recognition in RoW markets, even if perhaps not an illustrious image.

Private Equity is the last candidate, though perhaps for less than obvious reasons. With the slowed economic era, the returns that shareholder activism was generating have also diminished. However, this era is witnessing PE taking on less of a 'conflict role' and more of a 'assistive role'. The replacement of Ed Whitacre with the appointment of Daniel Akerson as CEO, demonstrates Washington's, Whitacre's and the GM's Board's sensitivity to the requirements of the private equity sector. (Akerson well established in that field as a Director of Carlyle Group was appointed to the GM Board by the Autos Task Force in 2009). As mentioned in a previous web-log post at the time of the Akerson appointment, GM still has much to do to divest of its sizable asset-base, from the tangible defunct property and plant, the core of standalone divisional operations, to the less tangible goodwill value of dormant brands. Akerson will know how the PE sector operates, and it will be his remit to enthuse PE companies to take up the GM stock offering as part of their own long-horizon plays, so as to to gain favour in purchasing any of the divested assets GM must shed. Here, his task is to seek-out PE relationships which provide a good balance between long-term mutual wealth generation through GM operations probably working with a PE company's own portfolio, and the more immediate arbitrage opportunity the PE sector can earn from purchasing and latterly selling tangible and goodwill assets.

Thus all said and done, the GM IPO will not be an easy marketing exercise for the NomAds themselves, having to pitch to a myriad of investor types, many of which are not the usual candidates, and with recognition that Washington has a close eye on the process so as to try and ensure it recaptures a proportionate value of its bail-out spend.

Even with hard-ball negotiations between the book-runners and buy-siders, that looks increasingly unlikely given the present global macro climate, and the fact that any buyer – patriotic or not – must be seen to be operating an up-trend portfolio.

Those buyers will use prime evidence such as GM's September's NA market share slippage (to 18%) in their negotiations, and whilst not a perfect outcome, the more realistic the IPO pricing, the better for all to conclude in a successful take-up. Infact, this is an instance where all parties - the buyers, the book-runners and the under-writers – have a real role to play as economic actors that underpin the fragile US economy.