On the morning of December 19, General Motors (GM) announced it will be purchasing 200 million shares from the United States government for a price of $27.50. GM will pay $5.5 billion for the shares in a deal that is expected to close by the end of the year. The remaining 300 million shares will be sold over the next 12 to 15 months beginning in January, and still account for approximately 19% of the outstanding shares on a fully diluted basis.
GM expects the transaction will be accretive to earnings per share, as GM's total shares outstanding on a fully diluted basis will be reduced by approximately 11%. GM expects to take a charge of approximately $400 million in the fourth quarter, which will be treated as a special item. CFO Dan Amman said that GM's balance sheet remains strong and will finish the year with an estimated liquidity of about $38 billion.
From a GM shareholder's standpoint, this is amazing news! The Company is getting rid of one of the three overhangs that have acted as an anchor on share prices. Despite not having an "active" role in running the automaker, the government's ownership was preventing CEO Dan Akerson from completing the turnaround story. The Company can't attract the talent it needs to take GM to the next level; it was forced to tap former executives that helped to run GM into the ground. Now, GM will be able to attract a new CEO with a competitive pay structure. The other two overhangs that I still see for GM are pensions and Europe. Both are not as big of a problem as they were six months ago, but still will act as an anchor for the stock. The worst is behind Europe, but even when Europe had a "strong" economy, operations were in trouble. Steps have been taken to try to fix it, but times will need to be much better before operations will really turn the corner. In terms of pensions, GM is altering its current workforce and buying out former employees in an effort to fund its pensions. However, the Company still had $134 billion in unfunded pension liabilities at the end of 2011. Since then, the Company has lowered its liability by more than $26 billion through targeted buyouts. That move lowered its unfunded pension liability by almost 20%; however, that means that GM still has more than $100 billion of unfunded liabilities. GM's global pension plans were underfunded by $25.4 billion at the end of 2011, up from $22.2 billion a year earlier, according to federal filings. Note: as of the end of the third quarter, the Company had $72.1 billion of current assets, of which approximately $34.5 billion was in cash.
As a taxpayer in the U.S., I am angry at this deal. If the government has such confidence in GM's progress, why can't we get a higher price than $27.50? Prior to this deal, the Treasury needed to sell its shares at $52.50 to break even on its investment. That means we are taking a nearly 50% loss on these 200 million shares. I know it would be a very long time before our investment reached the $52 level threshold and we could break even, but still it seems like we are jumping the gun.
All things considered, this is good news for GM. It gets a large monkey off its back, but I am still not completely convinced. I do think there will be a relief rally that will take shares north of $30; however, once fundamentals play a larger role, I think shares come under some more pressure. That being said, the $27.50 level is now an artificial bottom for the stock. I still favor shares of Ford (F), but can't argue when I see a chance to make some money. GM is trading with a forward PE of 7.38, while F is trading with a forward PE of 8.11. Both companies are seeing a tax benefit from their years of losses; however, both companies are also expected to have near record years in terms of profitability. So far this year, GM has outperformed F, gaining almost 37% compared to F's 10%.
Disclosure: I am long F.