U.S. Treasury To Sell Remaining GM Stake

It might finally be time to say goodbye to Government Motors, because General Motors is buying back $5.5 billion of the common stock that the U.S. Treasury currently owns.  GM will be paying $27.50 per share, which is a 7.9% premium over its most recent trading price prior to the announcement, but is a 17 percent discount vs. GM’s $33.00 IPO price in 2010.  Of note, the price that GM is paying for its own shares is also about half of the $52.39 the shares would have to be in order for Treasury to break even on its “investment” in GM.

The Government Motors name stuck on General Motors by critics of its 2008/2009 bailout during the financial crisis, and subsequent U.S. Treasury ownership of a majority of the company.  In the years since GM’s emergence from bankruptcy, Treasury has sold portions of its stake, and is no longer the majority shareholder, but remains the company’s single largest shareholder, with about 26.5% of GM’s stock.

GM’s buyback will purchase 200 million shares, and the government’s stake will shrink to about 19% of the company, or 300.1 million shares.

Then, over the 12-15 months, the U.S. Treasury will continue to sell shares in an “orderly” manner to completely exit its ownership of GM.  Those shares will be sold on the open market in tranches, but not all at once, or else the share price will be depressed by the suddenly large supply of GM stock.

Though the government is going to lose tens of billions of dollars on its sale of GM stock, the move is a necessary one for GM, the government, and GM’s other shareholders.  Government ownership was not favorable in the eyes of many buyers, with many people refusing to buy cars from a government-owned automaker, and some even swearing off their allegiance to the company forever.

Non-government investors in GM weren’t crazy about the overhang of government ownership – both from the standpoint of alienating some potential buyers and from the standpoint of having a very large investor next to you who has an overweight influence with management and the board of directors, and whose priorities may not match your own.  Another boon for investors:  as a result of the buyback, GM’s share count will decrease by about 11%.  That means that any earnings have to be spread among fewer shares – so GM’s earnings per share automatically goes up by another 11%.

GM executives are no doubt delighted by the stock buyback; under the terms of the bailout, GM executives were not allowed to travel via corporate aircraft.  While corporate air travel is a huge perk, it’s also an outstanding tool for maximizing an executive’s time, rather than asking them to fly commercially and getting stuck in an airport.  Under the terms of the buyback, corporate aircraft may again be used (that restriction came from the infamous late-2008 congressional testimony of Alan Mulally, Bob Nardelli, and Rick Wagoner).  There are also pay restrictions in place on GM executives; those will not be lifted at this time, and possibly will not be until the government has completely divested the company.  Funny, too, because tax revenue on a $2 million salary would be much larger than tax revenue on a $500,000 salary, and the government needs all the revenue it can get right now.

Interestingly, despite all of the controversy over TARP and bailouts – including banks, AIG, Fannie Mae, and Freddie Mac – most banks have repaid their TARP funds (489 of 707 banks have repaid their TARP funds), and of the $418 billion disbursed to banks and automakers, $381 billion has already been repaid.  So, the GM “investment” was not a profitable one, but it’s also going to be offset by the profitable investments in the likes of AIG, JP Morgan, etc.  TARP is now just $37 billion away from breaking even, and if you assume that Treasury will get $27.50 per share for its remaining 300.1 million GM shares, that will add another $8.25 billion to the tally (plus $5.5 billion from GM’s buyback).  That leaves $23.25 billion to go before breakeven, and 218 banks still to go.

Whether GM’s eventual independence from the U.S. government is enough to finally shed the “government motors” name is still unclear.  Had Treasury completely recouped all of its bailout money, I’d say the odds would have been better.  But with Treasury losing over $20 billion on GM that now will never come back, GM’s critics could say that the company has eaten $20 billion of the taxpayers’ money that will never be coming back.