GM bid for Ally units highlights bailout quandary

DETROIT/CHARLOTTE, North Carolina Thu Aug 16, 2012 4:41pm EDT

The General Motors logo is seen outside its headquarters at the Renaissance Center in Detroit, Michigan in this file photograph taken August 25, 2009. REUTERS/Jeff Kowalsky/Files

The General Motors logo is seen outside its headquarters at the Renaissance Center in Detroit, Michigan in this file photograph taken August 25, 2009.

Credit: Reuters/Jeff Kowalsky/Files

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DETROIT/CHARLOTTE, North Carolina (Reuters) - General Motors Co (GM.N), partly owned by the U.S. Treasury, is seeking to buy international operations from auto lender Ally Financial, which ironically wants to use the proceeds to help repay its own federal bailout aid.

With almost $33 billion in cash and marketable securities at the end of the second quarter, GM has the money to pursue such an acquisition. But analysts and investors disagree on whether that would be the best use of cash, with some preferring a stock buyback or dividend payment.

"There's a split deck on something like this," Guggenheim Securities analyst Matthew Stover said. "It depends on the time frame of the investor."

Since the financial crisis, large banks have paid back the bailouts they received from Treasury, but the latest maneuvering by GM and Ally, the automaker's former finance arm, shows how the bailout of the U.S. auto industry is taking longer to wind down.

The bailout remains a hotly debated topic on the campaign trail as President Barack Obama and Republican rival Mitt Romney joust in battleground states like Michigan and Ohio over the efficacy and ultimate cost of the program.

Critics of GM's $50 billion federal bailout in 2009 say the Obama administration stuck taxpayers with a bill that will never be paid in full as Treasury's 27 percent stake in GM remains underwater.

"Because of the Treasury Department's risky decision to swap debt for equity, Treasury gave away any right that taxpayers had to be made whole," said Charles Grassley, a Republican senator from Iowa. "Legally, GM can use its excess cash in whatever way it wants, and there's nothing we can do about it."

Treasury said this week the broader $80 billion auto industry bailout in 2009 would cost taxpayers $3.4 billion more than previously thought.

GM, which likes to tout its "fortress balance sheet," has said its focus is on investing in vehicle development, ensuring it has enough money to fix problems like its money-losing European unit, reduce its exposure on pension obligations and make acquisitions. It also has said paying back shareholders is another option but has given no time table for that.

Treasury officials declined to comment but previously have said the government would balance exiting its stakes in GM and Ally as soon as practicable with maximizing value for taxpayers.

Treasury has not expressed a view on a buyer of Ally's assets, said a person familiar with the situation who asked not to be identified. And GM executives have said government officials have never pressured them on business decisions.

To break even on the bailout, Treasury would need to sell its remaining 500 million shares of GM for more than $52 each. That is a far cry from the $21 they trade at now and sharply down from an initial public offering price of $33 in fall 2010.

A government watchdog said last month that Treasury needed a solid exit plan for its stakes in GM and Ally.

Jefferies analyst Peter Nesvold said the various holdings by Treasury represented "some conflicts of interest floating around" but added that GM's bid for the Ally assets was a reasonable use of cash.

Ally, 74 percent-owned by the U.S. Treasury after a series of bailouts, said in May it was selling operations in Europe, Canada and Mexico in a bid to speed up repayment to U.S. taxpayers.

GM has not said what assets it is biding for, but a second person familiar with the matter who asked not to be identified said the automaker was not seeking to buy all of Ally's international operations.

Ally was once the in-house lender for GM known as GMAC Financial Services but later became a separate company and was renamed. GM established the core of its current lending subsidiary when it bought AmeriCredit Corp in 2010. GM still has a 9.9 percent stake in Ally through an independent trust that is required to dispose of the Ally stake by December 24, 2013.

Ally, which hopes to complete the sale of its international businesses by year end, is expected to move to the next round of bidding in mid-September, the second source said. A majority of the 30 bidders are banks, mostly outside the United States, the person said.

The U.S. government injected $17.2 billion into Ally, which expects upon successful completion of its announced plans to have returned a total of two-thirds of taxpayers' investments.

Some analysts have speculated GM's bid could be in the range of $2 billion to $4 billion, while others said a bid approaching the book value of the assets is more likely. The bank has said the operations for sale represent $31 billion in total assets and carry a legal entity book value of $7.6 billion.

That kind of bid frustrates some analysts, who would prefer GM return cash to shareholders, as rival Ford Motor Co (F.N) has.

"Ford has initiated a dividend, paid back a sizeable chunk of debt and reached an investment grade credit rating by two of the three major agencies. They seem to be on a clearer road to recovery than GM at this point," Edward Jones analyst Matt Collins said.

However, Citi analyst Itay Michaeli said GM has been clear that its priority is investing back into the business, and added any push for buybacks or dividends has eased. He said investors are more focused now on GM closing a deal with hourly workers in Germany that would allow it to eventually close a plant there and cut costs in the money-losing region.

"If you're trying to reap concessions in Europe and you start super aggressively buying back shares, that might send the wrong message," he said.

(Additional reporting by David Lawder in Washington; Editing by Steve Orlofsky)

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