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General Motors products

Lynne Sladky

When the Canadian and Ontario governments pumped $9.5-billion (U.S.) into the bankrupt General Motors 17 months ago, Stephen Harper warned voters that they should not expect to see any return on the money.

The initial public offering of the reborn General Motors raises the prospect, however, that Canadian taxpayers could recoup their investment over the next several years and even eke out a tiny profit.

GM executives have hit the road to sell an IPO that, for now, has a projected selling price between $26 and $29 per share. While both the Canadian and U.S. governments intend to unload a portion of their stakes in the sale, they'll need GM shares to post healthy gains after the IPO to earn back their entire bailout packages.

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Depending on the IPO pricing, The Globe and Mail calculates Canada and Ontario will need to sell the remainder of their ownership stakes for around $47 to $48 per share. For the U.S., which has decided to sell a larger portion of its stock now, rather than later, the price will likely need to exceed $51.

In the unpredictable IPO market, a pop of nearly 100 per cent can happen in days. No one is expecting that here, thanks in large part to the overhang from GM's shoddy legacy of mediocre products and out-of-control employee-benefit costs.

In the longer term, though, the "new GM" could do well. It has sloughed off its employee health-care burden on a separate employee trust and is poised for growth in emerging markets.

Thanks to the bankruptcy restructuring, GM is cash-heavy and debt-light, with $31.5-billion in cash and securities and $8.2-billion of debt at June 30. By contrast, Ford Motor Co., which never resorted to a Chapter 11 filing, has $21.6-billion in cash and $117-billion in debt (including $90-billion in debt for its financing arm).

GM's strong balance sheet positions the auto maker to prosper if vehicle demand rebounds from the depressed levels of the past couple of years, when cars sales plummeted.

GM chief financial officer Chris Liddell, in a video prepared for GM's investor road show, says GM believes it can produce $11-billion to $13-billion of EBIT, or earnings before interest and taxes, in a "mid-cycle" sales environment, and $17-billion to $19-billion of EBIT at the high point of the cycle.

At nine times EBIT, which is roughly Ford's current valuation, the $11-billion low end of Mr. Liddell's mid-cycle range translates to a share price of about $52 for GM.

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Those EBIT numbers are in the range, or even below, the estimates of David Whiston, an auto industry analyst for Morningstar.

While GM says it can break even on an EBIT basis if North American consumers buy 10.5 to 11 million vehicles a year, Mr. Whiston believes North American production will return, in the coming years, to 18 million per year. "We're scrapping more vehicles than we're selling in North America, and that's not sustainable."

Mr. Whiston, who has a fair value estimate of $44 per share on GM for the coming three years, points to the redesigned Buick LaCrosse, which he says sells for about $7,800 more than its predecessor, and says, "Simply put, GM makes products that consumers are willing to pay more for than they used to." And with the company's new lower cost structure, "we expect GM to be printing money as vehicle demand comes back over the next few years."

Beyond North America, where it remains a tenuous No. 1 in market share, GM touts its presence in the emerging BRIC markets of Brazil, Russia, India and China, where it also leads. Ford and Toyota have similar North American market share to GM, but lag in the BRIC nations, while Volkswagen is near the top in the BRIC, but lags in the U.S. and Canada. "We clearly have the best of both worlds," Mr. Liddell said.

A full-valued GM would be a boon for Canada, which didn't really expect in June, 2009 to get its money back. The federal and Ontario governments handed over $6.3-billion, including a $413-million subsidy in April, 2009, and contributed $3.2-billion to a $33-billion debtor-in-possession financing package led by the U.S. federal government.

In exchange for the $9.5-billion, Canada got $1.3-billion in debt, which has already been paid back with $200-million in interest, $400-million worth of preferred stock that pays a 9 per cent dividend and what are now just over 175 million common shares.

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The $1.9-billion in repaid debt and preferred shares means Canadian taxpayers have a net $7.6-billion still in GM, and will be relying on the shares, worth about $5-billion at the upper end of the IPO range, to make up the difference.

The Canada Development Investment Corp., the holder of the common shares on behalf of the Crown and Ontario, intends to sell just under 30.5 million shares in the offering, plus another 4.6 million if demand calls for an underwriters' over-allotment option to be exercised. All told, that could yield just over $1-billion at the $29 top of the range.

The remaining 140 million shares, then, need to produce $6.6 billion in proceeds, or about $47 each, to recoup the remainder.

Special to The Globe and Mail

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About the Author
Business and investing reporter and columnist

A business journalist since 1994, David Milstead began writing for The Globe and Mail in 2009. During eight years at the Rocky Mountain News in Denver, Colo., he individually or jointly won nine national awards from SABEW, the Society of American Business Editors and Writers. He has also worked at the Wall Street Journal. More

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