By buying back $5.5 billion of the U.S. government's shares by year's end, General Motors Co. is taking a giant step toward shedding the stigma of "Government Motors" and delivering a measurable answer to the question of whether taxpayers' $49.5 billion bailout was worthwhile.
Then the Treasury Department will sell its remaining 300 million GM shares within 12 to 15 months. That would end the government's direct involvement in an iconic American company that nearly collapsed in 2009 before getting the bailout and quickly catapulting to profitability.
"As we come to the end of this chapter in our history, I believe most people are glad that General Motors is on the move once again, thanks to the courage and foresight of Presidents Bush and Obama, and the Canadian government," GM CEO Dan Akerson told employees in an email obtained by the Detroit Free Press. "The next steps for us are clear: Stay disciplined financially and operationally, sharpen our focus on the customer and continue to play offense with new products."
Investors liked the news Wednesday. GM shares closed at $27.18, lower than the buyback price, but its highest close since last February and up 38 percent from July 1. More than 54.7 million shares changed hands, more than six times GM's average daily volume.
The automaker will buy back 200 million shares, or 40 percent of Treasury's stake, by the end of the year at $27.50 each, a 7.9 percent premium over Tuesday's closing price and the highest price since February 2012.
Treasury's decision to offload its GM stock will cost the government. If the remaining 300 million shares also sell at an average of $27.50 each, Treasury would not recover about $12 billion of the total aid provided to GM.
A Treasury Department official said the government would sell its remaining shares "in an orderly fashion" with several options possible.
"One of those is what we call a prearranged trading plan where we sell a small number of shares essentially each day," the official said. "We would expect to begin that in January."
GM approached the government shortly after the presidential election with a proposal to buy back shares at the market price, but Treasury officials wanted a premium to reduce taxpayers' loss, the source said.
Taxpayers will still lose money on the $49.5 billion package of aid to GM, unless the government sells the remaining 300 million at an average of nearly $70. No one expects that.
The U.S. has recovered $28.6 billion from the GM bailout so far, including the buyback, a previous stock repurchase, a loan repayment and dividends.
The government has said it never expected to make a profit, but sought to balance the policy goal of exiting the auto business with the desire to minimize taxpayers' loss.
"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 told reporters. "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."
Now the market will decide.
"The fact that they're announcing this so quickly after the Obama election is great," Morningstar analyst David Whiston said. "I think a lot of U.S. fund managers are going to pay more attention in 2013 because the fear of the U.S. government dumping the shares onto the market has been calmed."
Ammann said he expected a positive reaction to the news because "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."
Citi analyst Itay Michaeli told investors that the "buyback is a vote of confidence from management that should lead to better appreciation of GM's" stock.
GM officials also hope it improves consumers' perceptions of its vehicles.
"We have some market research ... that has suggested that government involvement in the business has had some impact on sales," Ammann said. "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."
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