Analysing GM’s IPO through debt market
GM’s IPO is on its way to become second largest IPO in US history, if analysts have to be believed. IPO is expected to raise $16 Billion.
GM already has billions of dollars of bonds in the market which are traded a lot. GM issued these bonds in 2003 and it will mature in 2033, initially yielding 8. 375%. Currently the bond is trading at 34 cents on the dollar. Owners of GM’s old bonds will get 10% of the new equity, plus warrants to buy another 15%. So, we can expect the bond owners to get 20% of the equity after the IPO.
Now, the total liabilities on GM are $32.2 Billion. At 34 cent a dollar, which investors are willing to pay for taking the liability of total debt, the value of bonds is almost $ 11 Billion. This means total value of equity of GM could be around $ 55 Billion.
GM reported a net income attributable to common stockholder to be $2.2 Billion in first half of 2010. So, considering the continuation of same profits in second half, we can expect yearly profit to be around $4.4 Billion. This shows that the equities are priced at 12.5 times the earnings. This is seems to be over priced considering the P/E ration of its peers.
Ford has a market capitalization of $40.5 Billion. Ford’s auto business on its own could generated net income of about $4.4 billion this year. That would mean the company’s current market value is just over nine times earnings which is less than the expected post IPO valuation of GM.
Toyota reported first quarter profit of 190.47 billion yen ($2.23 billion), compared with a loss of ¥77.8 billion a year earlier. If this profit remains same for other quarters then Toyota’s annual net profit would be around $8.5 Billion at an exchange rate of 90 Yen/USD. Toyota’s market capitalization stood at $110.43 Billion. That is 13 times the earnings.
GM may be cheap against Toyota but it is definitely costlier than Ford. Looking at the recent depreciation in the brand value of GM, I can say GM is in fact costlier than Toyota too.