The U.S. Treasury plans to sell its stake in General Motors Co (GM.N) over the coming year, all but assuring a multibillion-dollar loss in a move that will end the automaker's "Government Motors" era.
Treasury's plan - a two-step process that includes a $5.5 billion stock sale to GM - is part of a broader push to wind down the controversial financial bailout under the Troubled Asset Relief (TARP) program. TARP was created by former president George W. Bush to prevent the collapse of the U.S. banking industry during the 2007-2009 financial crisis.
The planned GM sale will raise the proceeds that Treasury has recovered to $28.6 billion of the $50 billion bailout GM received. With $20.9 billion left from the original bailout, the government would have to sell its remaining shares at an average price of $69.72 to break even.
GM shares were up 7.1 percent at $27.31 on Wednesday afternoon on the New York Stock Exchange.
If Treasury, which will reduce its stake to about 19 percent when the buyback closes this month from about 26 percent at present, sold its remaining stock at the price GM is paying now, it would come up short by more than $12 billion.
"GM wins," Jefferies analyst Peter Nesvold said, pointing to the elimination of the government stake that has been acting as a drag on the stock price and to eventual higher earnings per share. "From a government standpoint, it's a mixed bag, but they went into it to save jobs, not as an investment." He said the buyback was lower than the $30 a share he had expected at the very least and was occurring earlier than anticipated.
GM's planned buyback of 200 million shares will give it more freedom from government oversight and likely result in a sales boost as some consumers unhappy over the U.S. taxpayer-funded bailout give the automaker a second look, GM Chief Financial Officer Dan Ammann said.
"This is very attractive to the company, to our shareholders," he told reporters at GM's Detroit headquarters. "It obviously brings some clarity and certainty around the U.S. Treasury exit.
"It's obviously good for the business in terms of continuing to remove the perception of government involvement in the company, which is going to be good for sales," he said, also noting that the reduced share count would boost earnings.
GM approached Treasury officials after the U.S. presidential election in November, but was rebuffed when it offered only to pay market value for the government's stock, according to a senior Treasury official. Treasury rejected a second offer of a small premium before the sides finalized the deal on Tuesday afternoon, said the Treasury official, who asked not to be identified discussing the negotiations.
"We've always looked at this as balancing speed of exit with maximizing return, and GM basically made us what we felt was a very attractive offer," the Treasury official said.
TARP TRIP NEARS END
TARP was approved by Congress as a $700 billion program, though Treasury eventually disbursed $418 billion. On Wednesday it said it had recovered $381 billion to date, or about 90 percent.
"TARP was always meant to be a temporary, emergency program. The government should not be in the business of owning stakes in private companies for an indefinite period of time," Treasury Assistant Secretary Timothy Massad said in a statement.
"Moving to exit our investment in GM within the next 12 to 15 months is consistent with our dual goals of winding down TARP as soon as practicable and protecting taxpayer interests."
Under the deal, GM will pay $27.50 a share for the Treasury-held shares, representing a 7.9 percent premium on Tuesday's closing price.
Treasury said it will then sell its remaining stake of about 300.1 million shares "through various means in an orderly fashion," and could begin the process, including sales on the open market, as soon as January.
The auto giant was dubbed "Government Motors" by many critics after it received its bailout package as part of the bankruptcy restructuring in 2009 under TARP.
Treasury's plans echo other recent moves. On Tuesday, Treasury said it would largely sell its remaining shares in bailed-out banks over the coming 12 to 15 months. Last week it sold the last of its common stock in American International Group Inc (AIG.N) at a profit.
This also would close Treasury's involvement with the U.S. auto sector. In June 2011, the agency sold its remaining 6 percent stake in Chrysler to Italy's Fiat SpA FIA.MI, which controls the U.S. automaker.
U.S. President Barack Obama heavily promoted his decision to use public funds to rescue the auto industry and save jobs as he campaigned for re-election in swing states like Michigan and Ohio. Voters in both states backed him again in the November 6 election, providing critical support in his victory.
Treasury officials reiterated on Wednesday that the auto bailout saved more than 1 million U.S. jobs and was not meant to turn a profit.
With Treasury's planned exit from GM, auto lender Ally Financial Inc will be the last major TARP recipient that has not yet paid back the government. Of the $17 billion it owes, Ally has paid back $5.8 billion.
Separately on Wednesday, Canada Finance Minister Jim Flaherty said his country had no immediate plans to sell its stake in GM. Canada and the province of Ontario have a combined 9 percent stake.
Ammann said the move and resulting Treasury plans will remove a "significant overhang" on the stock that has hurt sales and bring an "element of closure" to the bailout. Company research suggests eliminating the Treasury stake would benefit sales, he said.
Ammann said the deal was good for shareholders, when asked whether GM might be sued for paying Treasury a higher price than where the stock was trading at the time of the announcement.
However, one large shareholder loved the deal, as a spokesman for hedge fund manager David Einhorn said: "We applaud GM management for unlocking shareholder value by releasing excess capital and beginning a resolution of the government stake overhang."
Barclays analyst Brian Johnson said that once the government reduces its stake, GM likely will be eligible for inclusion in the Standard & Poor's 500 index .SPX, which could serve as a catalyst to drive up the company's stock price.
GM will end the year with estimated liquidity of about $38 billion, even after the deal, Ammann said. That will add to earnings per share by reducing the number of outstanding shares by about 11 percent.
Ammann said the deal will be funded through cash and not tap in to the $11 billion credit line GM secured last month.
Citi analyst Itay Michaeli said the deal showed GM's confidence in its ability to generate cash despite worries about the U.S. economy and the recession in Europe. "The ability to spend this amount of money on a share buyback shows they are putting their money where their mouth is," he said.
The deal also made a winner of Ammann, considered one of a handful of GM executives who could succeed Chief Executive Dan Akerson. Ammann, along with Akerson and GM general counsel Michael Millikin, negotiated the deal with Massad, Treasury Secretary Timothy Geithner, chief investment officer Matt Pendo and government attorneys over several weeks, according to the senior Treasury official and another person familiar with the talks who asked not to be identified.
Ammann did not provide details of the talks with Treasury, when asked whether negotiations picked up following the presidential election. Analysts said Treasury likely did not want this deal to be turned into a political issue.
Treasury also may have wanted to wait for the unveiling of the critical full-size pickup trucks that will go on sale next year, analysts said. GM showed the new Chevrolet Silverado and GMC Sierra on December 13.
GM will take a charge of about $400 million in the fourth quarter tied to the buyback.
In addition, Treasury relinquished certain governance rights, including required levels of U.S. manufacturing and barring the purchase of corporate jets, Ammann said. Senior executive payment caps under TARP remain in place.
"For GM management, it was very important to get out from under the 'Government Motors' moniker," Morgan Stanley analyst Adam Jonas said.
(Additional reporting by Alister Bull in Washington, Jennifer Ablan in New York, Paul Lienert in Detroit and Rick Rothacker in Charlotte, North Carolina; Editing by Gerald E. McCormick, Jeffrey Benkoe, Tim Ahmann, Matthew Lewis and Jan Paschal)