US likely to face initial loss on GM IPO: sources

A market value at the high end of that range would be above the roughly US$70 billion in market capitalization that GM needs to achieve for the U.S. government to break even on its US$43 billion remaining investment in the automaker.

But IPOs typically price at a discount of 10 percent to 15 percent to theoretical fair value to reward investors for taking a risk on a new issue and pave the way for future stock floats. In tough market conditions, that discount can be even larger.

“You have to sell people on the notion that there is an upside to what they are buying,” one of the sources said.

Another of the sources said the discount could be as much as 20 percent on the GM IPO compared with the U.S. Treasury's break-even point.

Preparations for the GM stock offering remain in the early stages. A number of the sources cautioned that the size and value of the deal and the size of the stake to be sold by the U.S. government have not been determined and will not be set for weeks.

Government Stake in

'Government Motors'

The U.S. government pumped US$49.5-billion-worth of taxpayer money into the automaker and took nearly 61 percent of its common stock.

GM has paid back US$6.7 billion in debt to the Treasury and returned another US$700 million in interest and dividends. The U.S. government also holds US$2.1 billion in perpetual preferred shares in the automaker.

That leaves the government with a roughly US$40 billion investment in the GM common stock that will debut in an IPO along with a new class of preferred shares that will convert into common shares under a mandatory provision.

In the days leading up to GM's August S-1 filing, Republican Senator Charles Grassley asked a special Treasury Department watchdog for an analysis of the GM IPO and how much money would be returned to taxpayers.

In its pitch to potential investors, GM will tout its global reach, recent gains in quality and pricing in its home market, and its sharply lower cost of operations after its 2009 bankruptcy, sources have said.

GM's US$1.3 billion second-quarter profit was its biggest since 2004, when industry-wide U.S. sales were near 17 million vehicles compared with the 11.5 million sales rate of August.

But GM will have to address investor concern that growth in industry car sales in the U.S. in the second half of 2010 and into 2011 will likely be slower than analysts had expected just a few months ago.

At the same time, GM will have to confront a pension shortfall that remains a liability from its pre-bankruptcy operations.

GM eliminated about US$40 billion in unsecured debt and other obligations in bankruptcy, but the automaker still needs to address a pension shortfall estimated at about US$26 billion.

A successful IPO would be a political victory for the Obama administration and would help GM distance itself from critics who dubbed it “Government Motors” after its bailout.

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