Dealtalk: GM faces $16 billion question as Treasury exit looms

A general view of the General Motors (GM) plant in the Eastern Seaboard Industrial Estate in Rayong province, Thailand February 22, 2011.

NEW YORK/DETROIT (Reuters) - General Motors Co (GM.N) returned to the stock market with much fanfare last fall, but another important period is approaching that may see the U.S. government significantly slash its stake in the automaker.

Six months after GM's $23.1 billion initial public offering, investors are speculating the U.S. Treasury is itching to sell a big chunk of its remaining 32 percent stake after the lock-up period for selling by major shareholders expires on May 22.

How and when the Treasury will exit its stake is on the minds of GM shareholders and potential investors alike. It's a $16 billion question many want resolved before they will embrace the company's shares, which are currently trading below the IPO price.

One scenario would be for GM to use some of its gigantic cash pile -- $36.5 billion in liquidity at the end of the first quarter -- to buy back a portion of the shares directly from the Treasury, people close to the company said.

The government has not yet discussed with the U.S. automaker details of its exit plan, including a potential share buyback or the timing and size of a secondary offering, a separate source close to the Treasury said.

"GM's got a higher level of cash on hand than it needs to run the business. It alleviates the overhang the market has been at least chattering about," one of the sources said of GM buying shares directly from Treasury. "It's positive for the shares the Treasury has remaining to sell.

"It's a good, simple solution, as opposed to GM executives going out on the road and pressuring the stock in another big way," the source added.

There are legal restrictions on buying back shares directly from one shareholder, but such a transaction could be negotiated, these people said.

The sources asked not to be named because they are not authorized to speak to the media. Treasury declined to comment.

"Our objective ultimately is to generate sufficient cash flow to fund the business ... and return excess cash flow to shareholders," GM spokesman Jim Cain said. "While we haven't ruled out any potential uses of cash, we do have more to do to strengthen our balance sheet."

The Obama administration, which received a nearly 61 percent stake in GM two years ago in return for its unpopular $50 billion bailout of the automaker, cut that holding in the IPO to 32 percent. The remaining stake is valued at about $16 billion based on GM's closing share price on Tuesday.

Before the IPO, GM was touted as a restructured company with a drastically lower break-even point in North America, a leading market position in China and other emerging markets, turnaround potential in Europe and a strong lineup of new fuel-efficient cars such as the Chevrolet Cruze and plug-in hybrid electric Chevy Volt.

But oil prices spiked unexpectedly, hurting sales of higher-margin trucks, and generous discounts to new-car buyers continued. Worries about supply disruptions following the earthquake in Japan also unsettled investors already anxious for the Treasury to exit its position in GM.

The net result: GM at $31.54 a share at midday Wednesday is trading below the November IPO price of $33.

"Once this uncertainty over this overhang (for GM's stock) is resolved, it has more upside," said Josef Schuster, founder of iPox Schuster, a fund that invests in IPOs including GM's.

POLITICAL CHALLENGE

Many investors think it is only a matter of time until the U.S. government sells the rest of its stake, because they believe the Obama administration does not want it to be an issue in the 2012 presidential race.

Unloading a big chunk of shares on the open market below the IPO price could be a political challenge, especially when GM executives and advisers sold more than $23 billion of shares to investors just six months ago.

That's where selling shares directly to GM could help. Such an approach could alleviate some of the downward pressure on GM's stock, potentially making it easier for Treasury to dispose of its remaining shares.

"Such a move also mitigates concerns about additional stock supply coming to market," J.P. Morgan analyst Himanshu Patel said in a note.

It remains unclear how much of its cash GM would be willing to spend on a share buyback in light of other needs, including funding its pension shortfall, another source close to the company said. It also is pushing ahead on investing in its operations, including Tuesday's announcement of plans to spend $2 billion upgrading 17 U.S. plants.

"This is a time where we have to keep our head down and really keep on the fundamental business of making great cars and trucks," Mark Reuss, president of GM's North American operations, said last week.

Treasury could sell a big chunk of its remaining stake in GM in the summer or fall, although doing so might lead to more losses on the automaker's bailout, people familiar with the matter have said.

A secondary offering would be much like the IPO -- where executives and underwriters court investors on a roadshow -- but it could be a harder sell with no compelling story.

"There's no real news; there's no real catalyst for them," said one investment banker, who asked not to be identified. "It's almost a tougher trade than the IPO itself."

Even after a secondary offering, Treasury is still expected to have a significant number of shares. It could opt to sell what's left to the market through block trades over time, rather than through another marketed offering, people familiar with the matter said.

At any rate, the U.S. government is set to lose money unless it sells its remaining shares at $53 a share -- a price that a senior Treasury official said was unlikely.

Making money on GM's bailout, however, was not the government's intention, and its stated policy of "exiting as soon as practicable" is a serious commitment, people familiar with the Treasury's thinking said.

"It's far more important for Obama to stand up and say, 'We got in, we got out and we saved jobs,'" one source said.

(Reporting by Soyoung Kim and Ben Klayman, additional reporting by Rachelle Younglai and Philipp Halstrick, editing by Matthew Lewis)