China’s SAIC shows interest in GM float

Financial Times, August 26, 2010

By Patti Waldmeir and John Reed

Last week Hu Maoyuan, chairman of SAIC, raised speculation that China’s most powerful domestic carmaker might take a stake in General Motors upcoming initial public offering.

Mr Maoyuan said that SAIC “will watch GM’s IPO closely, and think carefully if we should purchase the shares or not”.

The notion that the “new GM” might attract prominent foreign shareholders such as SAIC should come as no surprise for a company that sold 72 per cent of its vehicles outside the US last year, and 39 per cent in emerging markets.

But, amid a bearish mood on world capital markets, where Chinese investors are among the biggest confirmed or rumoured bidders for assets lately, the remarks by SAIC’s boss drew notice.

If SAIC’s mild expression of interest proved indicative of bigger plans by Chinese or other foreign shareholders in the IPO, it would almost certainly spark political controversy in GM’s home market.

SAIC is GM’s main carmaking partner in China, where the Detroit carmaker now sells more vehicles than the US. The companies have two joint ventures making cars and mini commercial vehicles, and plan to join forces to sell small commercial vehicles in India as well.

Bill Russo, head of the Synergistics auto consultancy in Beijing and former head of Chrysler in China, says he “wouldn’t be surprised” if SAIC bought into the IPO – if they are allowed to by the US government, GM’s biggest shareholder.

“It becomes an emotional issue that somehow the identity of GM would be transformed from a North American-centred to an Asian-centred company”, if SAIC took a big share, he adds. “But that is happening anyway – the global centre of gravity of the auto industry is shifting to Asia”.

Another China-based industry insider, who asks not to be named, says that a large stake for SAIC is unlikely, though for political reasons: “I am absolutely certain they would love to have a share . . . but they do not want to upset the US about this.”

GM’s IPO will be one of the biggest and an important milestone for President Barack Obama’s administration in an election year in which Americans are bitterly divided over its handling of the financial crisis that pushed GM into bankruptcy last year.

The US Treasury is expected to sell its 60.8 per cent stake down to a minority when GM lists shares in New York and Toronto this year as Washington begins to exit the shareholding that earned GM the pejorative nickname “Government Motors”.

For now, few Americans are expressing concern about the possibility that Chinese or other foreign shareholders might now buy a big stake in their largest domestic carmaker.

Daniel Howes, a columnist for the Detroit News, speculated last week that the IPO might see “a not insignificant number of those shares fall into the hands of foreign investors seeking the credibility (and technology) that could come with a sizable share of a restructured and recapitalised GM”.

The notion of an emerging-market carmaker making a play for GM or a portion of its assets and technology is not out of the question.

Last year Russia’s Sberbank teamed up with Canadian supplier group Magna International in a bid to buy GM’s European Opel-Vauxhall business and leverage its technology to build cars at Russian automaker Gaz, owned by the tycoon Oleg Deripaska. GM’s board later decided not to sell the company’s European arm.

Separately, Mr Deripaska as recently as mid-2007 held just under 5 per cent of pre-bankruptcy GM, but later sold the stake.

GM and Gaz have long-running ties, and in the past held talks on developing a low-cost car for Russia. Basic Element, Mr Deripaska’s investment company, declined to comment on GM’s upcoming offer.

GM’s pre-bankruptcy shareholder base included many foreign shareholders, and it plans to court them again. Its advisers, led by JPMorgan and Morgan Stanley, plan an international leg of the road show for the IPO, which could raise about $12bn to $16bn.

Analysts and people close to the company say that the “new GM” has many provisions in place to ensure against an unwanted takeover from outside.

GM now operates under Delaware law. Its IPO prospectus includes many deterrents to sovereign wealth funds or strategic non-US investors that might want to assume control.

Under various provisions outlined in the offer prospectus, GM could “delay, defer, or prevent a tender offer or takeover attempt” by a stockholder – though the issue would be moot in the case of a friendly stake taken by a close ally like SAIC.

GM’s S-1 filing also includes various selling restrictions on GM shares outside the US. US law also requires a strategic investor who buys more than 5 per cent of a listed company to file a 13D form with the Securities and Exchange Commission.

Amid tough market conditions that have seen other IPOs scuppered this year, some analysts say GM’s biggest challenge will be to place the shares successfully at all.

“There’s a lot of risk with this IPO”, says George Magliano, director of research for North America with IHS Automotive.

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