Treasury Aims to Sell GM at $133.78 – Analyst Blog

The special inspector general for the $700 billion bailout, Neil Barofsky, has revealed that the U.S. government should sell the General Motors (MTLQQ) stock for $133.78 per share in order to recover nearly $50 billion of loans it extended to the automaker last year.

 

Last month, GM filed the first batch of paperwork required to hold an initial public offering (IPO) of the stock, tentatively scheduled for mid-November. The company will sell preferred shares, the proceeds from which will be utilized for repaying the government loans as well as for general business purposes.

 

The IPO will allow the stakeholders of the company to sell off their shares. However, no dividend will be paid on the common shares.

 

Post bankruptcy, GM is primarily owned by the U.S. government and Canada government, and by a trust fund providing medical benefits to United Auto Workers (UAW) retirees.

 

The U.S. government holds a 61% stake, the UAW union holds a 17.5% stake through its Retiree Medical Benefits Trust and the Canadian government holds 11.7%. The remaining shares went to the bondholders of the old company.

 

GM received $52 billion in U.S. Treasury (“UST”) loans by selling 61% ownership stake of the company and C$1.5 billion ($1.5 billion) in Export Development Canada (“EDC”) loans while going through the bankruptcy protection last year.

 

In April this year, GM repaid $8.1 billion in loans to the governments of U.S. and Canada, ahead of the scheduled maturity date of July 2015. The repaid amount constituted $6.7 billion in UST loans as well as $1.4 billion in EDC loans that it had received last year.

 

GM intends to repay the remaining $45.3 billion to the U.S. government and $8.1 billion to the governments of Canada and Ontario through the IPO.

 

Although the IPO will allow the U.S. Treasury to begin selling the 61% stake it holds, GM clearly stated in the filing that the U.S. Treasury would continue to own a substantial interest in the automaker following the IPO.

 

It is likely that the government would not sell all the shares at once. The company’s new CEO, Dan Akerson, has stated that the government may sell its shares over a couple of years in order to gain from rising share price.

 

GM’s share price is expected to rise with the improvement of its sales and finances and with the recovery in the market. In the second quarter of the year, GM recorded a profit of $1.3 billion or $2.55 per share compared to a loss of 12.9 billion or $21.12 per share in the second quarter of 2009, when the automaker was in the midst of bankruptcy filing.

 

The profit was attributable to the company’s aggressive cost reduction measures and streamlining of operations since its exit from the bankruptcy protection. The automaker relied heavily on rental-car, government and corporate fleets to drive sales, which are, however, less profitable than retail sales.