By Bernard Simon, Helen Thomas & Tom Braithwaite; The Financial Times ~ Oct 03, 2010

The first step in the US government’s efforts to extricate itself from General Motors is likely to raise substantially less money than initially expected.

Challenging markets and the difficulties of planning a long-term exit strategy from the Detroit carmaker have reduced the expected size of the float – from $12bn, when GM first filed its prospectus, to about $8bn.

According to those close to the deal, the initial public offering will value it at close to $60bn, short of the $70bn that some analysts estimate as the figure GM must fetch overall for US and Canadian taxpayers in order to break even. The sale, scheduled to proceed after the US mid-term elections in early November, could see about 13-14 per cent of the company sold – less than originally planned. Market conditions nearer the time will determine the eventual structure of the deal.

It is hoped that subsequent sales at higher prices over the next three years will increase the government’s average exit price. Current thinking would see the US government reduce its 61 per cent stake below the 50 per cent threshold, raising $7bn-$8bn from the sale, according to people familiar with the matter.

The Canadian government, in addition, would aim to raise about $1bn.

Pricing the shares will be a balancing act. The shares must be priced to sell, both to avoid a politically unpalatable flop and to encourage buyers to take part in subsequent offerings.

However, the government also wishes to avoid the appearance that it is unloading taxpayer assets at an undue discount.

IPOs, particularly in unfavourable markets, usually price at a discount to where their nearest peers trade.

The offering will also include $2-3bn in convertible preferred stock. A United Auto Workers Union healthcare trust, with a 20 per cent interest, is not expected at this stage to sell any shares, though that could change.

Ten banks based in the US, Europe and Canada will underwrite the IPO. According to people familiar with the deal, GM will market the shares mainly to groups of institutional investors in North America, Europe and Asia, including China. GM now sells close to 70 per cent of its vehicles outside North America, with China a bigger market than the US.

However, plans to market the stock to overseas or cornerstone investors have been scaled back given the likelihood that this first sale will not attract a full valuation.

The carmaker is also understood to be considering at least one public roadshow, probably in New York, which would also showcase GM’s line-up of new models.

While GM has posted profits for two consecutive quarters, the new-vehicle market is recovering more slowly than expected.

Copyright The Financial Times Limited 2010.