GM to buy back some preferred shares from UAW trust for US$3.2b

PUBLISHED : Tuesday, 24 September, 2013, 11:54am
UPDATED : Tuesday, 24 September, 2013, 11:54am

General Motors said on Monday it would buy back just under half of its preferred shares held by the United Auto Workers healthcare trust for about US$3.2 billion, essentially cutting company costs by financing the deal with lower-cost debt.

To finance the purchase of 120 million of the Series A preferred stock from the UAW Retiree Medical Benefits Trust at US$27 a share, GM said it would raise funds with a debt offering.

The UAW trust, which manages retiree health benefits for blue-collar auto workers, received an 8 per cent premium on what it would have received at the end of next year. The deal also gives it the money now, so it can invest earlier in hopes of raising more funds to pay retiree medical care costs that are set to rise further in the future.

GM did not specify how much it would raise but said the debt would be five-, 10- and 30-year senior unsecured notes, which would be offered on or before September 30.

It said it expects interest rates on the debt would be far below the preferred shares’ 9 per cent dividend, which currently results in an annual payment of US$620 million.

The UAW trust received its preferred shares as part of the automaker’s US government-funded US$49.5 billion restructuring and bankruptcy in 2009.

“Management is choosing to raise capital to fund the transaction given the cheap cost of financing due to the ongoing low interest-rate environment,” Buckingham Research analyst Joseph Amaturo said in a research note.

The deal allows GM to maintain a healthy cash balance and Amaturo, who has a “buy” rating on GM’s shares, expects the company will eventually buy back or pay a dividend on its common shares.

GM ended the second quarter with almost US$35 billion in total automotive liquidity, including more than US$24 billion in cash and marketable securities.

There are currently US$6.9 billion worth of the preferred shares, with the UAW trust owning US$6.5 billion, or 260 million shares, and the Canadian government US$400 million, or 16 million shares. GM has the right to buy back those shares on or after Dec. 31, next year, at US$25 each.

GM has said previously that it intended to buy back the preferred shares when allowed. However, the automaker negotiated the earlier repurchase from the UAW trust.

As a result of paying a US$2 per-share premium and taking an accounting loss on the deal, it expects to record a charge of about US$800 million in the third quarter that would be treated as a special item.

Amaturo also said the deal with the UAW trust strongly indicates GM management is comfortable with the June launch and rollout of the redesigned full-size pickup trucks. Analysts have said the Chevrolet Silverado and GMC Sierra, along with related SUVs, generate more than US$12,000 per vehicle in profit and account for about 60 per cent of the company’s global profit.

Also on Monday, Moody’s Investors Service upgraded the company to an “investment grade” rating with a stable outlook, citing the strength of its US vehicle portfolio and solid position in the world’s largest auto market in China. It was the first time since August 2005 that GM has had an “investment grade” rating from one of the three major US rating agencies.

Analysts expect GM to begin paying a common dividend once the US Treasury has exited its stake in the automaker. GM has not paid such a dividend since May 2008. Rival US automaker Ford Motor resumed paying a common dividend in March last year after suspending it for more than 5-1/2 years.

Last week, the US government sold another block of shares in the Detroit automaker, reducing its holding to 7.3 per cent, or 101 million shares. The government, which originally took a 60.8 per cent stake in GM as part of the bailout in 2009, has said it intends to sell the rest of its shares by the end of March.

Chief Financial Officer Dan Ammann said last month that GM had no current plans to pay a common dividend, but it was something it expected down the road. In June, Chief Executive Dan Akerson said GM would consider a dividend and more share buybacks going forward, citing the company’s December repurchase of a block of Treasury shares for US$5.5 billion.