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Should Investors Worry About GM's Treasury Ownership Overhang?

|Includes:General Motors Company (GM)

The uncertain timeframe of U.S. Treasury's disposition of its GM ownership has undoubtedly been on the minds of potential GM investors pver the past year. Given the undervalued share price, the overhang is a material impediment to the stock's regression to its fair value. So the question is, in the near-term, will the Administration begin dumping its shares before the election?

To answer the question, I looked into the Treasury's ownership of GM and its plan to perhaps sell the shares before this year's presidential election and put together a timeline below. The Treasury contemplated selling its 32% stake in mid-2011; however, with a break-even share price of $53, Treasury ultimately did not want to take a $10-15bn loss at prices of $23-30/share in Aug/Sept 2011, and pushed back its plan to sell. In Dec. 2011, Bloomberg reported that $30 is the minimum price the Treasury would consider for a secondary offering. I believe there's very little incentive for the Treasury to sell its shares before the election. Romney will use the GM bailout as a prime example of Obama's big government and socialist policies, and Obama will point to GM's return to profitability and saving 1.4mm jobs as defense. Selling the shares at a $10bn+ loss adds nothing to Obama's argument, but vice versa, would rile both the taxpayers and shareholders. The Treasury also has a majority stake in AIG, and has taken a similar stance on its sale plans.

(click to enlarge)

Another question is, has the Treasury influenced over GM's operations in any way since the IPO? There are no direct examples of government intervention in management decisions. However, the Treasury froze executive compensations at GM, AIG and Allied Financial in 2012, despite GM's $7.6bn profit in 2011. This is good for publicity, but puts some risk around talent retention if the government holds compensation below industry average. There's also a conflict of interest being both GM's owner and regulator. The Chevy Volt gained negative press after its battery caught fire in government safety testing, and GM responded quickly and expensively by providing loaner vehicles to existing Volt owners and installing sensors in new Volts to detect battery fluid leakage. The Old GM might have spent more effort to rebuttal the regulators' testing. While the Volt is a rounding error to GM's sales and that there's no direct sign of government interventionism which compromised equity value, potential conflict of interest will always be a concern to shareholders.

Disclosure: I am long GM.

Stocks: GM