The U.S. Treasury Dept. will begin selling its stake in General Motors over the course of the next 12-15 months, beginning with the auto maker buying back 200 million of the shares.
The moves likely will result in a loss for taxpayers but could bolster GM’s stock price and help it shed an onerous “Government Motors” nickname.
GM stock responded to the news, rising nearly 8% to almost $27.50 per share in morning trading on the New York Stock Exchange. Analysts have speculated government ownership in GM has kept its share price far below its record-setting 2010 initial public offering of $33, because traders refused to pay a premium knowing a government sell-off was certain.
The stock has traded as low as $19 over the past 24 months, with troubles in Europe also a headwind on the market price.
The “Government Motors” label, attached in 2009 when the Treasury used $49.5 billion of taxpayer money to fund GM’s bankruptcy, also has kept the lid on the auto maker’s stock price. Negative reaction to the bailout has kept some consumers away from its showrooms.
Speaking at industry conference in 2010, then-GM Chairman and CEO Ed Whitacre said the nickname was hurting sales. Whitacre, who guided the auto maker out of bankruptcy, reportedly had devised a plan for the government to shed its stake earlier, but could not gain the necessary backing.
“We don’t like the label of ‘Government Motors’,” he said at the time. “We want to get away from that. We know it has turned off customers. It turns us off. You lose your reputation and it is hard to get back.”
GM currently commands 17.8% of the U.S. light-vehicle market, according to WardsAuto data, compared with 24.4% in the years prior to its bankruptcy.
GM will pay $5.5 billion, or $27.50 per share, in the buyback. That amounts to a premium of 7.9% over the stock’s closing price on Tuesday and leaves it almost certain taxpayers will lose billions on the bailout. So far, the Treasury says, it has recovered $28.7 billion from GM in repayments, stock sales, dividends and other income.
Despite the potential financial hit, the Treasury continues to defend the rescue scheme, which was a hotly debated point during this year’s U.S. presidential-election campaign, saying the emergency measure saved more than 1 million jobs and always was meant to be temporary.
“The government should not be in the business of owning stakes in private companies for an indefinite period of time,” says Timothy G. Massad, Treasury assistant secretary-financial stability.
Sen. Carl Levin (D-MI), who lobbied for the bailout, says the Treasury’s exit plan strikes a balance between maximizing taxpayer returns and limiting government involvement in private enterprise.
“Both GM and the Obama Admin. have been eager to bring the government’s role to a close in a responsible and orderly way, and this plan meets those goals,” Levin says in a statement.
The government also used taxpayer money to back financial firms, banks and insurance groups as part of the Troubled Asset Relief Program begun under President George W. Bush in 2008.
The Treasury will divest its remaining 300.1 million shares, or roughly 19% stake, in GM beginning as soon as next month. It will conduct stock sales according to market conditions.
“This announcement is an important step in bringing closure to the successful auto industry rescue, it further removes the perception of government ownership of GM among customers, and it demonstrates confidence in GM’s progress and our future,” Chairman and CEO Dan Akerson says in a statement.
GM will take a charge related to the buyback of $400 million in the fourth quarter. The auto maker says the move will leave its newly fortified balance sheet intact with $38 billion in remaining liquidity after the transaction closes.
“A fortress balance sheet has been a pillar of GM’s financial strategy and has enabled us to undertake today’s actions,” says Chief Financial Officer Dan Ammann.
A key element of the buyback agreement waives certain governance rights held by the Treasury as a part of the bailout agreement, which GM characterizes as mostly “administrative,” but does not remove restrictions on executive compensation.
GM has cited the cap on executive pay as a hurdle to hiring top executive talent.
The agreement also waives government restrictions on the ownership and use of private aircraft. GM encountered a huge wave of public backlash in 2009 when executives used company jets to commute to Washington for congressional hearings on a potential rescue plan. GM sold its planes shortly after and tells WardsAuto it has no plans to buy new aircraft.
The buyback additionally waives production volume requirements dating back to 2010, which GM estimates it has exceeded by 7%. Future production-volume requirements also are removed.
The governments of Canada and provincial Ontario still hold 9% of GM’s shares from their combined $10 billion investment in the auto maker during its crisis. They reportedly have no plan to divest at this time.
