GM To Buy Government Preferred Stock
News that the government will sell only $6b-$8b worth of its GM equity has been joined by an even more surprising GM IPO announcement: GM will buy the Treasury’s entire $2.1b holding of preferred stock in the initial offering. GM has not announced how much it will pay for the stake, and the Detroit News reports that it’s not yet clear if GM will also buy some $400m in preferred stock held by the Canadian and Ontario governments. We’re also getting word via Twitter that GM will put $4b in cash and $2b worth of its stock into its overdrawn UAW pension fund, as well as making a $2.8b payment to the UAW VEBA account. With a $5b line of credit secured, GM says these and other steps will reduce its debt by $11b over an unspecified timeline. And speaking to Reuters, GM CEO Dan Akerson made it clear what the point of these moves are:
It’s up to people like you and me, the burden we share, that we deliver on the promise and return the investment to the American taxpayers. We are going to do our level best to make that happen, and we will only do that by expanding our industrial base and entering new markets and being a better competitor.
Of course, we’ll have to see what value The General places on the preferred stock to know how seriously Akerson should be taken. After all, talk is cheap and money isn’t. [UPDATE: It appears that GM will buy the preferred stock for $25.50 each, essentially giving the Government its book value of $2.14b]
More by Edward Niedermeyer
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A couple of points about this pre-election window-dressing: - the money to redeem the preferred shares is coming out of GM's massive pool of taxpayer-supplied cash. As someone quipped about the previous loan repayment, "At GM, when we say we're giving you your money back we really mean it!" - "GM says these and other steps will reduce its debt by $11b" translates as, "We will give part of our hoard of taxpayer cash to groups we owe money to." There's no magic in this; debt will be reduced because cash will be reduced.
if not cash, what else would you use to pay down debt, jellybeans? if that cash can be invested at a return higher than the interest expense (seen "risk free" rates lately?) then maybe you can spin it as a negative. Unwinding Govt ownership and reducing debt (and interest expense by $500 mn annually) is simply a positive and hardly innovative. The long term viability and/or trustworthyness of the company are another issues.