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U.S. Treasury Sheds Another 30M GM Shares

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The U.S. Treasury Department revealed that it would sell another 30 million shares of General Motors Company (GM - Free Report) as part of its plan to dispose of remaining shares of the company by April 2014. The United Auto Workers (UAW) Retiree Medical Benefits Trust will sell another 20 million shares along with the Treasury, pushing the size of the offering to 50 million shares.

The Backdrop

GM filed for bankruptcy in mid-2009. Post bankruptcy, GM was primarily owned by the U.S. government and Canada government, and by the UAW retiree health care trust fund.

The U.S. government held a 61% stake in exchange for a bailout loan of $49.5 billion under the Troubled Assets Relief Program (TARP), the trust fund 17.5% and the Canadian government 11.7%. The remaining shares went to the bondholders of the old company. After the bankruptcy restructuring, GM’s remaining assets were put into another entity called Motors Liquidation Company (“MLC”).

In November 2010, GM had initiated an initial public offering (IPO) of common stock that helped it repay $23.1 billion to the U.S. government. The Treasury was left with roughly 500 million shares of GM, equivalent to 33% stake in the company.

In December last year, GM repurchased about 200 million shares from the U.S. government for $5.5 billion leaving nearly 300 million shares with the Treasury. Post-sale, the stake of U.S. Treasury in the company had been reduced to nearly 18% from 26.5%.

In January, the Treasury Department initiated a plan to sell the remaining shares by next year and hired JPMorgan Chase & Co. (JPM - Free Report) , Citigroup (C - Free Report) and Morgan Stanley & Co. (MS - Free Report) for conducting the sale. The department revealed that the banks will get a penny for every share they sell, for a fee of up to $3 million.

As part of that plan, the Treasury Department first sold 22.2 million shares for $621 million worth of GM common stock in March, recovering $30.4 billion of the bailout fund. Post-sale, the Treasury was left with about 255 million shares or a 16% stake in GM.

Apart from the U.S. government, UAW trust decided to sell its stake but the Canadian government and the province of Ontario revealed no plans of selling their 9% stake in the company at present.

Timely Sale

The government’s decision to sell GM shares is very timely when they are hitting 52-week highs repeatedly (over and above the IPO price of $33.00) and being reinserted into the Standard & Poor’s 100- and 500-stock index, replacing ketchup maker H.J. Heinz in the benchmark stock index after the market closes today.

Heinz will be taken over by Warren Buffett’s Berkshire Hathaway (BRK.B - Free Report) and the Brazilian-backed investment firm 3G Capital today. GM should be happy re-establishing its position in the S&P 500 index, which was lost after the company went into bankruptcy.

GM’s epic return to the S&P 500 is expected to generate strong demand for its stock, pushing up the price as some funds that follow the index need to add the stock to their portfolios.

The Bottom Line

In order to breakeven, the government would need to sell the remaining shares for more than $78 on an average, which seems unlikely at present. Shares of the company reached $34.02 after the market closed yesterday, a 2.7% dip from the previous day closing.

However, the upside is that the company’s stock could be boosted further due to the launch of its revamped full-size pickup trucks such as 2014 Chevrolet Silverado and GMC Sierra trucks, continued recovery in the overall auto industry and successful restructuring actions in the disquieting Europe in this year.

Another upside is that revenues generated by the sale will help the government remain below the statutory debt limit of $16.7 trillion giving the Obama administration more time to strike a deal to raise the debt cap and avoid a default.

Currently, shares of General Motors retain a Zacks Rank #3 (Hold).

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