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General Motors Company (GM - Analyst Report) will repurchase 200 million shares from the U.S. government for $5.5 billion as the Obama administration plans to wind down the Troubled Asset Relief (TARP) program, originally created by the former president George W. Bush to save the U.S. banking industry during the financial crisis in 2007-2009. The deal reflects an average price of $27.50 for the Treasury-held shares.
Post-sale, the stake of U.S. Treasury (UST) in the company will be reduced to 19% from 26.5%. As a result, the buyback will help the automaker shed its “Government Motors” tag significantly. Further, it will boost the company’s earnings per share, as it will lower the company’s shares outstanding by roughly 11%.
GM filed for bankruptcy in mid-2009. Post bankruptcy, the U.S. government acquired 61% stake in GM in exchange for a bailout loan of $49.5 billion. However, after several repayments amounting to $23.1 billion, the UST was left with 500.1 million shares of GM, equivalent to 26.5% stake in the company, and $26.4 billion in loans to be recouped.
UST plans to sell its remaining 300.1 million shares in the company through various means (including open market sale) in the next 12-15 months. It will begin the process in January next year.
If the government sells the remaining 300.1 million shares at $27.50 per share, currently paid by GM, UST would fall short of $12.7 million in its loan recovery. However, the government doesn’t bother about that, as saving the jobs was much greater an issue than considering the bailout fund as an investment and profiting out of it.
According to GM Chief Financial Officer Dan Ammann, the share buyback will be funded through cash and not tap in to the $11.0 billion credit line secured by the company last month. Due to the buyback, GM will incur a charge of about $400 million in the fourth quarter of the year.
UST has been shedding its stake in many companies, bailed out under the TARP program during the period of financial crisis few years back. Last year, the Treasury sold its remaining 6% stake in Chrysler, controlled by Italy’s Fiat SpA (FIATY).
GM, a Zacks #3 Rank (Hold) company, posted a 9.7% fall in earnings to 93 cents per share (excluding special items) in the third quarter of the year from $1.03 in the corresponding quarter a year ago. However, earnings per share in the quarter far exceeded the Zacks Consensus Estimate of 61 cents.
Total profit ebbed 5.9% to $1.6 billion from $1.7 billion a year go. The decline in profit was attributable to lower profits from North America and increased loss in Europe.
Revenues in the quarter grew 2.5% to $37.6 billion, surpassing the Zacks Consensus Estimate of $36.3 billion. Worldwide sales volume inched up 1.6% to 2.3 million units from 2.2 million units a year ago. However, total market share declined to 11.6% from 12.1% in the third quarter of 2011.
Operating income fell 11.2% to $1.6 billion from $1.8 billion a year ago. However, adjusted earnings before interest and tax rose 4.5% to $2.3 billion from $2.2 billion a year ago.