Workers on the line at the GM Canada assembly plant in Oshawa, Ont.Darren Calabrese/The Canadian Press
The Chapter 11 bankruptcy protection worked. Now the question is whether General Motors Co. will pay back all the money North American taxpayers provided to keep it afloat.
Buoyed by a slow recovery in North American demand and results from emerging markets such as China, the auto maker reported its first quarterly profit since 2007, marking a milestone in the auto industry's tepid recovery.
But the company also signalled that an initial public offering of the new GM is probably not coming soon. Debt-strapped governments in Ottawa, Washington and Ontario that shelled out about $62-billion (U.S.) to keep GM alive last year, have so far received $8.4-billion in repayments, but will have to wait before they receive the rest of their money, which is tied up mainly in common shares of the company.
"I'm in the unusual position of trying to keep people's expectations low on this topic," chief financial officer Chris Liddell said on a conference call. "The IPO will happen in good time when the company is ready and the markets are ready."
The latest talk on Wall Street has GM's market debut playing out by the first quarter of 2011. The auto maker is expected to stage one of the largest stock sales ever seen, perhaps eclipsing the record-setting $19-billion initial public offering from Industrial & Commercial Bank of China in 2006.
Even then, there is no guarantee that Canadian or U.S. taxpayers will ever be repaid in full. To do that, the initial public offering would have to raise more than $60-billion.
A substantial portion of this deal will be earmarked for Canadian investors, reflecting the fact that Ontario and federal taxpayers helped bankroll the GM bailout and now own 11.7 per cent of the company.
"The government's objective will be to sell as much stock as possible, as quickly as possible. In Washington, there's no perceived upside to continued ownership of GM," said one New York investment banker who has worked with the auto maker in the past.
A portion of the deal is likely to be designated for domestic investors. "There will be no barriers to Canadian buyers when GM comes to market. To the extent anyone wants this stock, it's likely to be available," predicted this veteran of cross-border deals.
While results for the first quarter were solid, more information is needed before an IPO can be done successfully, said long-time industry analyst Joe Phillippi, who heads Auto Trends Consulting Inc. in Short Hills, N.J. "Given this company's history, I want to see a full year's worth of numbers so I can measure them throughout the year," Mr. Phillippi said.
Positive cash flow, free cash flow of $1-billion, and a profit in GM's North American operations were among the positive trends underlying an overall first-quarter profit of $865-million - compared with a staggering quarterly loss of $5.97-billion a year earlier as GM teetered near bankruptcy.
Profit was also generated in the company's international operations, which includes China, now GM's biggest market.
"The first quarter heartens me that we're on the right track," Mr. Liddell said.
The bankruptcy blew out tens of billions of dollars in debt. The new GM holds debt of $14.2-billion, compared with more than $50-billion a year earlier. Interest payments plunged to $337-million in the first quarter from $1.2-billion a year earlier, helping the company move into the black.
GM is now in the process of selecting an investment bank that will advise it and various government investors on what to do next. This contest is complicated by the fact that any Wall Street bank that wins the advisory role will also want to be able to participate in a potentially lucrative stock sale: Investment banking sources say GM and several banks are attempting to work out how to manage this potential conflict of interest.
The investment dealers that have been mentioned as potential advisers to the U.S. government are boutique dealers that would not expect to play leading roles in an IPO. The Wall Street Journal reported three Wall Street firms are vying for the advisory role: Greenhill & Co., Lazard Ltd. and Perella Weinberg Partners.
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Five things that helped GM return to profitability
1. The U.S. Chapter 11 bankruptcy process wiped out tens of billions of dollars in debt and interest costs. Interest expense fell to $337-million (U.S.) in the first quarter from $1.2-billion a year earlier.
2. The auto maker eliminated four divisions - Pontiac, Saturn, Saab and Hummer - cutting costs and enabling it to trim the size of its dealer network.
3. GM slashed the size of its white-collar work force in North America and reached new deals with the Canadian Auto Workers and United Auto Workers unions that reduced its outlays for pensions, health care and other benefits.
4. New products such as the Chevrolet Equinox and GMC Terrain made in Ingersoll, Ont., have taken off and are generating thousands of dollars more in revenue per unit than the vehicles they replaced.
5. The vehicle market in the United States has bounced back from the dismal levels of late 2008 and early 2009 that sent GM and Chrysler LLC into Chapter 11 protection.
Greg Keenan
Andrew Willis