GM IPO bodes well for new auto equity offerings

By Soyoung Kim

NEW YORK (Reuters) – The blockbuster initial public offering of General Motors Co (GM.N: Quote, Profile, Research) has refueled investors’ appetite for the long-ignored auto sector and bodes well for other sector companies expected to tap the public market after sweeping restructurings.

The U.S. auto industry, which emerged from the punishing downturn of the late 2000s with sharply lower costs and higher profit potential, could see a robust pipeline of new equity offerings in the next 12-18 months, senior equity capital markets and M&A bankers said at the Reuters Global Mergers and Acquisitions Summit in New York.

The catalyst for auto industry dealmaking in the near term is expected to mostly come from parts suppliers that emerged from bankruptcy in the hands of creditors led by hedge funds and distressed investors, or in some cases private equity investors, dealmakers said.

“As we come out of this period of distress, a lot of the equity of these companies is held in transitional hands,” Will Dotson, head of North American industrials group at Morgan Stanley (MS.N: Quote, Profile, Research), told the Reuters Summit.

“We’re going to see that capital begin to flow into more natural owners — whether that’s a strategic buyer in some cases, or whether that’s public market investors who want to play the auto sector.”

Morgan Stanley and JPMorgan Chase & Co (JPM.N: Quote, Profile, Research) were the lead underwriters on GM’s $23.1 billion initial public offering in November, the world’s largest IPO. Bank of America Corp (BAC.N: Quote, Profile, Research) and Citigroup (C.N: Quote, Profile, Research) were the other lead underwriters.

“The GM IPO definitely opened the door for both new and existing investors who hadn’t really paid attention for a while to start to pay attention again,” said Mohit Assomull, global head of equity syndicate at Morgan Stanley.

“It’s certainly an area of the equity market where investors … found it very hard to make money for a very long time, so this (GM IPO) was a good way to reinvigorate the sector,” Assomull said. “You’ll see a lot more activity in the auto and broader transportation sector to come.”

Automakers GM and Chrysler Group LLC, and their parts suppliers such as Delphi and Visteon, all used Chapter 11 to slash obligations and debt, and dealmakers say how the new owners of these companies monetize their assets will likely mark the auto industry’s story in coming years.

Despite concerns about volatile oil prices and a slow rebound in consumer spending, the auto industry shows signs of accelerating a recovery that began last year. U.S. auto sales totaled 13.1 million vehicles on a seasonally adjusted annualized rate in March, compared with 10.4 million vehicles for the full 2009 year.

Chrysler, Delphi and Allison Transmission are among the major IPO candidates expected to take advantage of rising public market confidence in the restructured industry.

“It’s always nice when your comparable company has done extremely well. Before the GM IPO, you had Ford (Motor Co (F.N: Quote, Profile, Research)) show really a very strong recovery,” said Frank Maturo, Bank of America co-head of equity capital markets.

“There wasn’t a lot of equity issuance in the space because of how distressed it got itself into. Given that Ford was doing so well and now you came with another company in a sector that hadn’t seen a lot of issuance, the GM timing was perfect,” Maturo said.


When Detroit’s near-collapse in 2009 prompted a flurry of failures across the supply chain, analysts and executives forecast that some of the sector’s strongest players, such as Johnson Controls Inc (JCI.N: Quote, Profile, Research) and Magna International Inc (MG.TO: Quote, Profile, Research), could lead consolidation in the highly fragmented and commoditized industry.

That expected wave of deals has so far failed to materialize, and dealmakers speaking at the Reuters Summit said any major strategic consolidation for the sake of scale is less likely,, as suppliers focus on deals to get the right technology or the right customer — deals which tend to be smaller.

“If we do see consolidation among suppliers … I think there’s going to be much more focus on how do you achieve a leading market position in a particular product area on a particular platform so you can really drive margins,” said Larry Hamdan, executive chairman of global M&A at Barclays Plc’s (BARC.L: Quote, Profile, Research) Barclays Capital.

While private equity firms are starting to show renewed interest after having avoided the sector during the recent deep downturn, they remain cautious partly because of the cyclical nature of the industry and remaining doubts over whether the sector has fundamentally restructured itself.

“We are strategic in that business, so we go around the world and talk to everybody in it; but you have to be smart about where the consolidation wave is going and what the cycle timing is,” said Garrett Moran, senior managing director at Blackstone Group LP (BX.N: Quote, Profile, Research). Blackstone has made investments in supplier TRW Automotive Holdings Corp (TRW.N: Quote, Profile, Research), among others.

“But knowing who the good companies are is more important than the cycle. You can stand the cycle as long as you are financed for it and you have a long view,” Moran said.

Stephen Zide, managing director at Bain Capital, said that the auto industry will remain a “very complex” space.

“Certainly the Detroit 3 and all of their suppliers were very challenging businesses given the union dynamics and competition … I’m not sure that things are fundamentally different today although I think they could be, and they probably are for some businesses,” Zide told the Reuters Summit.

“You really have to get underneath the covers and really focus on the companies and their competitive positions. When the cycle comes through, everybody feels the cycle; but fundamentally strong businesses with really good strategic positions, they are going to be long-standing winners.”

(Reporting by Soyoung Kim, editing by Gerald E. McCormick)

GM IPO bodes well for new auto equity offerings