With the U.S. government announcing a plan to sell its stake in General Motors Co. (GM:US) yesterday, 2013 becomes the year GM sets its course for the future.
Chief Executive Officer Dan Akerson will move closer to remaking GM as a real company and not a ward of the government; will introduce a slew of new models, replacing 70 percent of its U.S. lineup over a year and a half; will continue reorganizing GM in ways both large and small; and will try to build on its string of quarterly profits.
“As today’s news travels around the world, the question will be asked, ‘Did GM truly learn the lessons of the bankruptcy?”’ Akerson told employees in a memo yesterday. “Our results show that we are changing the company so we never go down that path again.”
While the U.S. government’s $49.5 billion rescue of GM helped the company quickly restructure to survive the worst economy since the Great Depression, it left scars that have been slow to fade. GM’s aid, the largest piece of President Barack Obama’s industry bailout that became the centerpiece of his first term in office, left the automaker tagged as “Government Motors,” a moniker executives are eager to shed.
GM yesterday announced plans to purchase 40 percent of the U.S. Treasury’s stake (GM:US) in the company for $5.5 billion by year- end. It’s part of a plan by the Treasury to sell the rest of its stock in the Detroit-based company within 15 months, starting as soon as next month.
GM said it will buy 200 million shares for $27.50 each, a 7.9 percent premium over the previous day’s closing price. GM rose 6.6 percent yesterday to $27.18 at the close in New York. The shares gained 26 percent this year through Dec. 18, when they remained 23 percent below the company’s initial public offering price of $33 a share.
The deal came together quickly, two people familiar with the effort said. GM approached the Treasury about a buyback within the last month, said the people, who asked not to be identified because the talks were private.
The first offer didn’t include a premium and was rejected, a senior Treasury official said. GM came back with a new offer and negotiations proceeded until a mutually acceptable price emerged several days ago, the person said.
The deal was finalized Dec. 18 after the markets closed, this person said. GM’s board approved the deal that evening, said another person familiar with the situation.
Treasury, balancing its desires to maximize returns and to exit quickly, saw GM’s final offer as extremely attractive, given that buyback prices often are at a discount, the agency official said. With Treasury retaining 300 million shares, the U.S. can also capture any share growth over the coming months.
GM shares hadn’t topped the $27.50 price since July 2011, shortly after the government could begin selling shares after the 2010 IPO.
The price still puts break-even further out of reach. The Treasury has garnered about $23 billion through GM’s IPO, debt repayment, repurchasing of preferred stock, and interest and dividends. That means the U.S. would need almost $70 for each of the remaining 300 million shares to recoup its investment, up from about $53 before yesterday.
For other shareholders, yesterday’s deal will improve earnings per share by reducing the number of shares outstanding, said Chief Financial Officer Dan Ammann. It also means there will be less dilution of demand for the shares as the Treasury sells 40 percent fewer shares on the open market than it would have without the buyback.
Jim Flaherty, Canada’s finance minister, said yesterday that the government hasn’t decided when to sell its 140 million shares.
Since exiting bankruptcy, GM’s turnaround has gained momentum. The company posted a record full-year profit last year of $9.19 billion and reclaimed, if only for a year, its title as the world’s largest automaker. Since tumbling to $18.80 on July 25, the shares have rallied 45 percent. Through all of that, the government’s ownership and uncertainty over its eventual exit strategy remained as unanswered questions weighing on the shares.
“If any buyback could be described as fundamentally important (if not transformational) this is the one,” Adam Jonas, an industry analyst with Morgan Stanley, said in a note to investors. “GM has a clear path to shake the ‘Government Motors’ moniker once and for all. While impossible to quantify, we believe there is a genuine improvement in the commercial value for GM’s products that can crystallize over time following an ownership change.”
GM’s share price should now be unleashed from the weight of the government stake, said Jim Kee, president of South Texas Money Management in San Antonio, which purchased 500,000 GM shares in February expecting a 30 percent to 50 percent gain on the industrywide recovery.
Government ownership “put an uncertainty discount into the stock price that was offsetting some of the positives of the company,” Kee said in an interview. “But now that the government plans to exit, that will mean that GM’s decisions are GM’s and not driven by any other considerations that might not be shareholder-focused.”
The buyback and government exit are another piece in Akerson’s push to restructure GM. He’s building the foundation for his vision of how the company should work internally. He’s putting in new information-technology and financial-reporting systems that will help in his efforts to manage GM on a global basis by function and brands, and away from regional commands.
While he named a global head for Cadillac in October, he has said he hasn’t felt the same urgency to do so at Chevrolet. Other changes have been less dramatic, such as the Dec. 17 filing that said the board added “senior vice president” to the list of officer titles and removed “group vice president.”
The move was the sort of corporate-governance clean-up, which would typically occur during bankruptcy, that didn’t at GM because of the speed in which it emerged, a person familiar with the company’s thinking said.
GM’s buyback deal with Treasury removes some of the restrictions that have been placed on the automaker as stipulations for receiving government money, Amman told reporters yesterday in Detroit.
The company no longer faces restrictions on using private airplanes, he said. GM and Treasury continue to discuss pay restrictions, which Ryan Brinkman, an industry analyst with JPMorgan Chase & Co., wrote as the lead author in a note to investors yesterday “continues to partly inhibit attracting outside talent.”
GM said it expects to record $400 million in costs this quarter because of the transaction announced yesterday, which it plans to close this year.
The bailouts of GM and Chrysler Group LLC by U.S. and Canadian governments propped up an industry that has since reported three straight years of at least 10 percent growth. GM received $49.5 billion from the U.S. in 2008 and 2009 as part of its restructuring, Treasury said yesterday. Taxpayers still owned 32 percent (GM:US) of the company before the buyback.
“There’s been this nagging fear anytime the stock gets closer to $27 or $28, where the chatter about the government sell-down picks up again,” Peter Nesvold, a Jefferies & Co. analyst in New York, said in a phone interview. The government’s exit of GM is “going to materially lift an overhang that’s been over the stock,” he said.
For the automaker, the transaction is a way to move past the political controversies.
GM executives were particularly eager for the government to begin exiting as the company prepares to introduce a redesigned pickup in the second quarter. GM’s market research has found that the association with government ownership hinders some sales, especially among truck buyers, a person familiar with the figures said.
The redesigned Chevrolet Silverado pickup will be one of 13 new Chevys planned for next year as part of GM’s efforts to update its product lineup following bankruptcy.
“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,” Ammann told reporters at GM’s headquarters yesterday. “This is very attractive to the company, to our shareholders. It obviously brings some clarity and certainty to the U.S. Treasury exit.”
The transaction doesn’t affect GM’s creditworthiness, Standard & Poor’s said in a statement. The cash used is within the automaker’s liquidity and Treasury’s eventual exit removes uncertainty, S&P said.
The Treasury Department, which has been unwinding itself from ownership stakes in other businesses helped with bailouts, said in a statement that it was time to exit the GM stake.
The Congressional Budget Office estimated in October that the Treasury’s Troubled Asset Relief Program, which bailed out companies including American International Group Inc. (AIG:US), Citigroup Inc. (C:US) and GM, will cost taxpayers $24 billion, down from an estimate of $109 billion in March 2010.
The auto industry represents most of the loss. The Treasury’s most recent estimate of the cost to taxpayers for its rescue of GM, Chrysler and Ally Financial Inc. (ALLY:US) was $24.3 billion as of Sept. 30. The department updates the figure on a quarterly basis.
“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,” Timothy Massad, an assistant secretary, said in the statement. “The government should not be in the business of owning stakes in private companies for an indefinite period of time.”
The U.S. economy is better off for the bailout, George Magliano, senior principal economist for IHS Automotive in New York, said in a telephone interview.
“The recession would have been a lot deeper and a lot worse, if you can imagine that, if this did not occur the way it did,” he said. “Now, we’re finally seeing the light at the end of the tunnel.”
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