U.S. to cut its stake in GM by a third when automaker goes public
Tuesday, November 2, 2010; 8:11 PM
The U.S. government will pare back as much as one-third of its stake in General Motors when the auto giant goes public this month, according to sources familiar with the matter.
The Treasury Department is expected to sell about $7 billion of its shares, bringing the government's ownership of the beleaguered auto company down from 61 percent to 35 percent. The Obama administration is eager to begin unwinding the extraordinary rescue of GM that took place after the financial crisis even as doubts remain that the government will ever fully recover the $50 billion of taxpayer money spent on the firm's bailout.
The company will go public about Nov. 17, and the stock will probably be priced from $26 to $29 a share - much lower than what some analysts say it should fetch.
David Whiston of Morningstar said that a fair value for the stock was closer to $44 a share but that the price would probably be lower because Wall Street remains nervous about the economy.
"It's not the best time to go public," Whiston said, pointing to persistently high unemployment.
GM, which will announce the terms of its public offering Wednesday before launching a campaign to pitch the stock to Wall Street analysts and investors, has delivered promising results this year after filing for bankruptcy in 2009. The company reported second-quarter net income of $1.54 billion.
As impressive as the turnaround has been, the analysts and investors said they might want to see more quarters of solid results, a problem that GM executives might encounter during their roadshow for investors.
Whiston said investors have been hesitant to invest in GM because of the government's presence. "It's a very unusual situation," he said.
In rescuing the automaker, the United States directly invested about $50 billion in GM. In exchange, the federal government received a 61 percent ownership stake in the company, as well as preferred shares and about $6.7 billion in loans, which were repaid this year.
GM became a private company owned by the U.S. government, a United Auto Workers health-care fund, the Canadian and Ontario governments, and pre-bankruptcy GM bondholders. The public offering of stock will return it to the New York Stock Exchange.
The United States is expected to sell off more of its stock in GM next year, similar to the exit strategy it employed while unwinding investments in Citigroup and insurance giant American International Group. How much of the U.S. investment will be repaid depends largely on the performance of the company stock.
For the government to recoup its investment, the market value of the company must rise to about $70 billion. It's estimated that the value of the entire company will be $50 billion at the start of trading this month.
Administration officials have remained adamant that the decisions surrounding GM's public offering are up to the company. GM is responsible for filing the initial public offering, the roadshow to pitch its stock and raising billions of dollars from investors.
Furthermore, a strong GM debut on the stock market would represent one step in a long process. GM must prove it can produce strong sales and sustain itself as a viable company to maintain investors over the long term.
"Our task going forward here is to exit the company in a way that preserves the taxpayer interests and the jobs that are at stake," said Treasury spokesman Steve Adamske.
Staff writer Brady Dennis contributed to this report.