The US government's short stint in the car business is coming to an end.
The Treasury Department yesterday said that it would sell its remaining stake in General Motors by 2014, writing the final chapter of a US$50 billion ($60 billion) bailout that saved the car giant but stoked a heated national debate about the Government's role in private industry.
Taxpayers are sure to lose billions of dollars in the deal, even though GM has bounced back from the darkest days of 2008, when it almost ran out of cash.
The company has racked up US$16 billion in profits during the past three years and added more than 2000 American workers.
Now GM is looking forward to the day when it can shed the stigma of government ownership and bury the derisive moniker of "Government Motors," which it says kept customers away from dealerships.
"This is very attractive to the company and to our shareholders," GM chief financial officer Dan Ammann said.
The deal is "obviously good for the business in terms of continuing to remove the perception of government involvement in the company, which is going to be good for sales".
When the government sells its last GM shares, the Treasury Department projects that cars will be the biggest money-loser of all the corporate bailouts. The government already lost more than US$1 billion on the bailout of Chrysler, which has repaid all its loans.
"There should be no expectation about getting back the taxpayers' money," said Phillip Swagel, professor of public policy at the University of Maryland and a former assistant treasury secretary under President George W. Bush who authorised the first instalment of GM's bailout.
Under the deal, GM will spend US$5.5 billion to buy back 200 million shares from the Treasury at US$27.50 each, with the sale closing before year's end.
That will leave the government with 300 million shares, or a 19 per cent stake, which it plans to sell during the next 12 to 15 months. GM will fund the deal from its cash balance, which at the end of September was close to US$32 billion.
The Treasury Department has held the stock for more than two years while awaiting a better price. It issued a statement yesterday that said the bailout saved the business at a critical time.
"The auto industry rescue helped save more than a million jobs during a severe economic crisis," said Timothy Massad, Treasury's assistant secretary for financial stability. "The government should not be in the business of owning stakes in private companies for an indefinite period of time."
GM shares sold for US$33 each when the company returned to the public markets two years ago. Analysts expected further growth, and the shares rose shortly after the sale. But they fell dramatically early this year as the US economy slowed and Europe headed toward recession.
Citi analyst Itay Michaeli said the government ownership has held down the stock price because investors feared the Treasury would flood the market with big blocks of shares. The government, he said, is probably expecting a big price bump because of the GM buyback.
"The thinking is perhaps you sell some of it now, that starts to lift the overhang and that potentially allows a better exit [price] for the remaining shares," he said.
GM will buy the 200 million shares at US$27.50 each, about an 8 per cent premium over Wednesday's closing price of US$25.49.
The shares shot up more than 9 per cent yesterday to US$27.91, the highest price of the year, before falling back somewhat.
Breaking even would require selling the remaining 300 million shares for an average of about US$70 each - more than double the current trading price.