The government's exit from GM stock will mark the end of its direct involvement in an iconic American company that fell into disrepair and nearly collapsed in 2009 before receiving a $49.5 billion bailout and returning to job growth and profitability.
GM said today that it would buy back 200 million shares from the U.S. Treasury Department by the end of 2012 in a $5.5 billion deal. That would reduce the government stake from 26% to 19%.
The U.S. plans to exit its equity stake in GM over the next 12 to 15 months by selling its remaining 300 million shares in the market.
"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," CEO Dan Akerson said in a statement.
GM said it would pay $27.50 per share in the buyback deal, reflecting a 7.9% premium over Wednesday's closing price of $25.59. The company will record a $400 million charge on its balance sheet in the fourth quarter.
At that share price, the government will take a loss. The government, which said it would sell the rest of its shares in an "orderly fashion" in the market, needed to sell its 500 million remaining shares at a price of about $53 to break even. Now, the government must sell its remaining 300 million at a price of nearly $70 to break even.
The government has said it wanted to balance its desire to get out of the auto business with the desire to recover more funds for taxpayers.
"Overall the automotive industry in the U.S. today is in extraordinarily good shape -- the best shape it's been in in decades," GM Chief Financial Officer Daniel Ammann said this morning. "General motors is a big part of that. We've been adding jobs, growing the business, developing great products, doing well in the marketplace and that's fundamentally what we're here to do."
GM shares jumped 8.8% in pre-market trading to $27.75.
Auto industry analysts have been expecting the U.S. Treasury Department to announce a resolution for its GM shares within early 2013. Some analysts have said a share buyback would be warmly received by the market and attract new investors to GM shares who have been scared off by the government's ownership position.
"From our point of view this is very attractive to the company and to our shareholders," Ammann said. "It obviously brings some clarity and certainty around the U.S. Treasury exit and the timeline of that, which has been a question mark in the marketplace.
"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, good for the customer base over time."
Jefferies analyst Peter Nesvold said he was surprised GM paid a premium to buy back its shares and that he expected a price closer to $30.
"While an eventual selldown was not a surprise, the timing, price, and structure were. We're not surprised to see the stock trading up pre-market by 6% to 8% on the news," he said in a note to investors.
GM, which plans to buy the shares using its cash resources, said it would have about $38 billion in liquidity after completing the transaction. The company does not plan to tap its recently renegotiated credit facility to pay for the deal.
As part of the deal, the government will immediately remove some restrictions it had placed on GM as result of the company's $49.5 billion bailout. The company will now be allowed to purchase corporate aircraft, for example.
The government will continue to impose corporate compensation restrictions on GM.
"The auto industry rescue helped save more than a million jobs during a severe economic crisis, but 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," U.S. Treasury Assistant Secretary for Financial Stability Timothy G. 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."
After the bailout, which was started by President George W. Bush and continued by President Barack Obama, critics labeled GM as "Government Motors" and GM became a subject of political rhetoric in the 2012 presidential campaign.
"We have some market research that we've done over time that has suggested that government involvement in the business has had some impact on sales," Ammann said this morning. "Therefore as we move past this stage of the company's development, we would expect that to be a benefit -- good for business, good for selling more cars."
Ammann declined to offer details on the timing of talks between the Treasury Department and GM. He said they've had "ongoing discussions" but maintained that it was "their decision" to sell shares.
"They didn't have to sell," he said.
Distributed by MCT Information Services
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