What the GM bondholders get from the IPO (Detroit Free Press)

Posted: Nov. 15, 2010
In GM IPO, stakeholders could walk away with billions as stock hits the market this week

Some will see billions as stock is released to public this week
By CHRISSIE THOMPSON
FREE PRESS BUSINESS WRITER

This week, General Motors' stakeholders will see some cash. Finally.
If all goes as planned, GM will price its initial public stock offering on Wednesday, and the stock will hit the market on Thursday morning with new owners.

As trading begins, owners such as the U.S. Treasury will walk away with billions of dollars in exchange for releasing their GM stock to the public.

But that doesn't include GM bondholders -- many of whom are Detroiters who supported the home team years ago through their investment portfolio.

During GM's bankruptcy last year, the bondholders were given a 10% stake in the new GM. But they won't actually receive the shares until the liquidation of the cast-off portion of the old GM that is still in bankruptcy. That's expected to take three to six months, according to an insider from a firm that's a major bondholder.

Until then, GM's bonds will continue to trade. And starting this week, so will the stock -- with everyday Joes like Kris Trexler eager to get a piece from the stock's first public owners.

Trexler, a Los Angeles film and video editor, said he cried when he turned in the EV1 electric car that GM canceled a decade ago. He's now one of the consumer advisers testing a Chevrolet Volt for three months -- and he already has a Volt on order for when the test ends.

"After driving this car ... I can't think of any reason I wouldn't buy some stock," Trexler said. "This company is back, and they've proved it to me."

Old GM bonds guarantee shares of new GM stock

"I've been holding them for years. What's another couple of months?"

That's the strategy Northville's Frank Drew says he's using for his General Motors bonds. The bonds, with a face value of about $150,000, are now trading at about a third of their original value. But once the part of the old GM still in bankruptcy is liquidated, Drew will get GM stock. His bonds will be put in a pool with about $37 billion worth of bonds and other unsecured claims, and 10% of GM's 1.5billion common shares will be issued to bondholders proportionately to the value of their bonds.That stock will be Drew's to do with as he wishes -- just as it will be for the buyers of GM's stock when it hits the market Thursday, 16 months after the company exited Chapter 11 bankruptcy.

GM is planning to sell up to 419.75 million common shares and 69 million Series B preferred shares to hedge funds, money managers and long-term investment firms. Those firms will then trade the stock on the New York and Toronto stock exchanges.

The automaker set a target range for the common shares at $26 to $29 each, but GM is expected to raise that range early this week by no more than a few dollars, according to two sources familiar with the situation. As executives finish their road show presentations to investors in North America and Europe, they're gauging the interest of the all-important long-term investment firms. GM needs those firms to hold stock for months, or even years, to keep it stable.

By all accounts, demand for GM stock is strong, likely enough for every possible share to sell. And the recent market improvements only help. The Dow Jones Industrial Average has gained about 500 points in the last month, and more than 1,000 in the last two months, closing Friday at 11,283.

Probable buyers include GM's Chinese automaker partner SAIC and investment funds from the Middle East.

That could create controversy for the IPO's largest seller, the U.S. Treasury, which is planning to use the sale to lower its stake in GM from 60.8% to slightly more than 40%. The treasury has said that some foreign investors would be allowed, but consumer advocate and former presidential candidate Ralph Nader cosigned a letter last week to President Barack Obama, urging him to suspend the IPO, partially because of the need to keep investment in the U.S.

Nader was also concerned that the government plans to sell part of its stake at a loss. The government needs to average $43.67 per share to break even on its $50-billion investment in GM, above the likely range. The treasury is hoping GM's stock will grow in value over the coming months and years so it can make more money when it sells the rest of its shares.

An increase in stock price is likely, said a person from a firm that owns a large number of GM bonds. The firm expects GM's stock to quickly reach the mid-$30 range the bond trading currently implies. And by 2013 or 2014, the person said, the firm expects the stock to hit $60 to $70 each, as long as GM fulfills executives' predictions that the company will make $11 billion to $13 billion annually before interest and taxes in an average sales climate.

GM bondholders will also receive warrants to buy more stock by either 2016 or 2019. Bondholders will be able to receive that extra stock by paying either $10 or $18.33 per share, which will count as revenue for GM. The warrants will take bondholders' total share in GM to 23.85%.Contact Chrissie Thompson: 313-222-8784 or cthompson@freepress.com