DETROIT — Investor demand for General Motors stock is so high that the company may raise its target price range for the shares before Thursday’s initial public offering, a person briefed on the matter said Monday.
The automaker, just 16 months out of bankruptcy protection, has impressed analysts and investors with its third-straight quarterly profit and a prediction of much bigger earnings if U.S. auto sales continue to improve.
Any share price increase would certainly be a boon for GM’s largest stockholder, the U.S. government, which is trying to get back the US$50 billion it gave GM last year to get through restructuring.
GM said earlier this month that its owners, including the government, will sell 365 million shares of common stock for $26 to $29 per share. The company will sell 60 million preferred shares at $50 each.
But since that range was announced, investors have shown so much interest that the company and its banking advisers are considering a price increase, at least for the common shares, said the person, who asked not to be identified because they are not authorized to speak publicly on the sale.
“There is legitimate demand for this,” said Scott Sweet, senior managing partner of the research firm IPO Boutique.
Sweet said investment bankers have told him the final price for the common shares will likely be $30 to $30.50 when it is announced on Wednesday after stock markets close. It was unclear whether the price of the preferred stock, which would pay a 5.5- to 6-per cent dividend and be converted to common shares in 2013, would be increased.
The Wall Street Journal, citing a person it did not identify, reported Monday that the new common share price range would probably be $31 to $33.
GM spokesman Selim Bingol and Treasury Department spokesman Mark Paustenbach would not comment on any possible price increases.
At the midpoint of the current common stock price range, $27.50, the sale would bring in just over $10 billion for the U.S. government and other GM owners, the Canadian and Ontario governments and a union health care trust fund. The U.S. government would get over $7 billion.
But if the price rises to $30 per share, the total figure jumps to $11 billion, with the government getting nearly $8 billion. The preferred shares could bring in $3 billion at $50 each.
By selling some of its shares in an IPO, the U.S. government would also will reduce its stake from 61 per cent to 43 per cent. That could drop to 35 per cent depending on whether bankers take the option to sell more shares.
That could ease animosity toward GM because of the government bailout, which the company said has irked some potential buyers and hurt its sales.
Ontario Finance Minister Dwight Duncan has said the federal and Ontario governments will sell about 30 million of their shares in General Motors.
GM’s investment banks, led by J.P. Morgan and Morgan Stanley, are likely to take an option to sell 15 per cent more shares, which could bring the government even more money.
GM, though, can’t increase the share price too high because it could exceed limits placed on investors’ orders.
Demand for the automaker’s shares is rising as its financial outlook improves. Last week, GM announced a third-quarter net profit of $2 billion, bringing its earnings to a healthy $4.2 billion for the year. Also, in presentations to investors, GM said its debt and labour costs have been cut so much that it can break even at the low point in an auto sales slump. When sales fully recover, the company could make $17 billion to $19 billion per year pretax.
The possibility of a price increase comes during a week that could be the biggest for IPOs since 2007, according to investment adviser Renaissance Capital LLC. The IPO market has improved steadily since August 2009. The sector had been almost frozen for nearly a year after massive losses on mortgage bonds upended global credit markets.
Sweet wrote in a note to investors that two other IPOs slated for this week also have more orders than shares, management consultant Booz Allen Hamilton Inc., and the broker-dealer LPL Investment Holdings Inc.
Some of GM’s investor demand is coming from overseas, including automaker SAIC, GM’s government-owned partner in China, which may buy $500 million worth of shares. GM also has courted investment funds in the Middle East and Europe.
Foreign investment, which is common in the U.S. auto industry, could come with a political backlash because GM stock in the IPO is largely unavailable to individual buyers.
Brokerages such as Charles Schwab and Scottrade, which handle trades for smaller investors, aren’t taking part in the GM offering. Fidelity has an agreement with GM underwriter Deutsche Bank to sell GM shares to retail investors. But to place an order, investors must have at least $500,000 in assets with Fidelity, make 36 trades a year or be a premium investor, which normally is for high net-worth clients.