Saturday, November 13, 2010

Obama Sellout To China

AFP/Getty Image

In this Wall Street Journal article Sharon Terlep tells us that China plans to buy a 4% stake in the newly issued shares of GM(Government Motors).

NEW YORK—In a sign of the changing fortunes of the world's top two economies, China's biggest auto maker, SAIC Motor Corp., is negotiating to acquire a stake of about 1% in General Motors Co. worth about $500 million, according to a person familiar with the matter.

The U.S. auto maker also is prepared to sell more than $1 billion worth of shares to sovereign wealth funds in the Middle East and Asia. Combined, the sales would give foreign investors roughly 16% of the shares to be sold next week under an initial public offering of stock, and give them a stake of some 4% in the Detroit auto maker. GM declined to comment on the investment talks.

The issue of overseas investors buying GM shares in the company's IPO has been a sensitive one for the U.S. government, which plans to reduce its 61% stake in the auto maker to around 35% through the IPO.

The investment in GM by government-owned SAIC would be the latest in string of deals giving Chinese companies stakes in big-name Western companies. In 2007. China's sovereign wealth fund, China Investment Corp. took a 9.9% stake in securities firm Morgan Stanley. Pacific Century Motors recently took over GM's former steering unit, now called Nexteer, and Shougang Corp. bought Delphi Corp.'s brake unit.

The U.S. Treasury has to walk a fine line. Attracting foreign investors will be a key to pulling off a listing of this size. But the Treasury has also had to weigh the possible political outcry if investors abroad are allowed to acquire a significant stake in GM, after U.S. taxpayers spent $50 billion to carry the company through bankruptcy reorganization, people familiar with the matter have said. The Canadian government also helped bail out GM, which has operations in Ontario.

In a previous article written November 2, 2010 by Terlep she told us that the government will lose money on its intial offering.

The initial public offering plan envisions the shares would be priced at $26 to $29 each, these people said. The actual price of the stock to be sold in the IPO would be set about Nov. 17, and the sale would take place the following day.

But for the U.S. to break even through sales of the rest of its stake, the share price may need to rise more than 60% from its initial level, to about $50.

The Obama administration is seeking to recoup the $49.5 billion that taxpayers poured into GM. Critics refer to the company as "Government Motors," and the U.S. ownership stake has tainted the company in the eyes of some potential car buyers.

GM last week returned $2.1 billion to the U.S. government, bringing the total amount it has handed back to $9.5 billion, through loan repayments, interest payments and dividends, the Treasury said.

It appears the Obama administration is helping the Chinese make a quick buck on the taxpayers dime. It's not like the government was having a problem selling shares of the new IPO.

Reuter's reports that there are $60 billion dollars worth of orders for the new shares, six times the amount it intended to raise.

NEW YORK, Nov 12 (Reuters) - General Motors Co's [GM.UL] landmark initial public offering has already garnered $60 billion in orders, six times the amount it had planned to raise, in a sign of healthy investor interest for the massive automaker that was in desperate straits just over a year ago.

Just over a year after a politically unpopular $50 billion bailout that left the U.S. Treasury with a 61 percent stake, GM filed to sell about $10 billion worth of common stock and $3 billion of preferred shares. Such an offering would mark the second-biggest U.S. IPO ever after Visa Inc (V.N) and one of the largest, globally.

The full overallotment could take the total IPO amount to as much as $15.65 billion. It would also cut the U.S. Treasury's stake to just over 40 percent.

Pricing at the top end of the range would value GM at $43.6 billion based on 1.5 billion common shares. Assuming exercise of warrants that are in-the-money, the share count jumps to 1.8 billion and GM's value rises to more than $52 billion.

For U.S. taxpayers to break even, GM needs a market value of roughly $70 billion.

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