* Treasury to sell first shares below break-even-sources
* 61 pct Treasury sale could take several years-sources
* Taxpayer break-even is around $70 bln GM market value
(Adds details on government stake, GM Q2 results, pension
By Clare Baldwin, Soyoung Kim and Kevin Krolicki
NEW YORK/DETROIT, Sept 3 The U.S. government is
likely to take a loss on General Motors Co [GM.UL] in the first
offering of the automaker's stock, six people familiar with
preparations for the landmark IPO said.
Subsequent offerings of the government's holdings may be
profitable depending on how investors trade the newly listed
stock, the sources said.
But the question of whether taxpayers are ultimately made
whole on GM's $50 billion bailout could be left open for years,
the people said.
It could take more than three years for the Treasury to
sell down its remaining stake in GM after the IPO, one person
said. That would push a final accounting into the next
A decision to price the initial GM shares below the cost to
taxpayers would follow the usual Wall Street practice of giving
the first investors in a new stock a discount, but it could
also help allay investor concern in the face of the slow
recovery of the U.S. economy and flat auto sales.
Preparations for GM's IP0 remain confidential. Both GM and
the U.S. Treasury have declined to comment, citing restrictions
by U.S. securities regulators.
The Obama administration has pledged to exit its investment
in GM as quickly as possible while holding out the prospect
that taxpayers could ultimately be paid back in full.
Treasury spokesman Mark Paustenbach declined to comment. GM
spokesman Tom Wilkinson also declined to comment.
GM plans to begin a roadshow for its IPO immediately after
the Nov. 2 U.S. midterm congressional elections, paving the way
for a stock debut on Nov. 18, sources have said.
GM in August filed paperwork for an IPO that could
potentially be worth as much as $20 billion, making it one of
the biggest IPOs of all time.
The U.S. Securities and Exchange Commission is now
reviewing the automaker's S-1 filing.
Analysts and potential investors have projected a market
value for GM of between $50 billion to around $90 billion,
based on projections for the automaker's cash flow, comparisons
with rival Ford Motor Co (F.N) and trading in bonds in the old
GM which are convertible into shares in the new company.
A market value at the high end of that range would be above
the roughly $70 billion in market capitalization that GM needs
to achieve for the U.S. government to break even on its $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
"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
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
GOVERNMENT STAKE IN 'GOVERNMENT MOTORS'
The U.S. government pumped $49.5 billion worth of taxpayer
money into the automaker and took nearly 61 percent of its
GM has paid back $6.7 billion in debt to the Treasury and
returned another $700 million in interest and dividends. The
U.S. government also holds $2.1 billion in perpetual preferred
shares in the automaker.
That leaves the government with a roughly $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 $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
GM eliminated about $40 billion in unsecured debt and other
obligations in bankruptcy, but the automaker still needs to
address a pension shortfall estimated at about $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.
(Reporting by Clare Baldwin and Soyoung Kim in New York and
Kevin Krolicki in Detroit; editing by Carol Bishopric)