Happy New Year!
The Wall Street Journal reports:
General Motors Co. said it will purchase 200 million shares of its stock held by the U.S. Treasury Department in a first step toward the government’s exit from the auto maker within the next 12 to 15 months.
The auto maker will pay $5.5 billion for the shares in a deal that is expected to close by the end of this year. The repurchase price of $27.50 a share represents a 7.9% premium over the closing price on Tuesday. The purchase would reduce the Treasury’s stake in GM to 19% from 26.5%. . . .
News of the purchase pushed GM shares up in early trading.
Easing the Treasury’s hold in GM has been a significant challenge for the auto maker, which is attempting to revive its image with Americans following its bankruptcy and federal bailout in 2009. GM was branded with the nickname “Government Motors” and its status remains a sore spot for many tax payers who felt their money shouldn’t have been used for a bailout.
GM had approached Treasury about repurchasing stock earlier in the year, but the Administration did not act; I think it is obvious that the Administration wanted to wait until after the election. The stock price tells you why, as the reports indicates:
Once GM’s buyback is complete, the Treasury will have recovered about $28.7 billion of the $50 billion it invested in GM. Based on current share prices, it is unlikely to recover its full investment after it sells the rest of its shares.
The Treasury had been reluctant to sell its 500 million shares because it needed the stock to hit $52.39 for the government to break even. Now it must sell its remaining shares at $69.72 to hit the break-even mark. The Treasury had the chance to exit GM in November 2010 when the auto maker’s initial public offering priced the stock at $33, but it never made the move to sell.
In an important development, China has removed investment limits by Qualified Foreign Institutional Investors (QFIIs). Bloomberg reports:
China scrapped a ceiling on investments by overseas sovereign wealth funds and central banks in its capital markets, part of government efforts to encourage long-term foreign ownership and shore up slumping equities.
Sovereign funds, central banks and monetary authorities can now exceed the $1 billion limit that still applies to other qualified foreign institutional investors, according to revised regulations posted Dec. 14 on the State Administration of Foreign Exchange’s website. The statement did not mention a new ceiling or an increase in the total investment quota allowed under the program also known as QFII.
The removal of the investment limit on sovereign investors “marks another step in the direction to gradually open up China’s capital account,” Wang Aochao, head of research at UOB Kay Hian Investment Consulting (Shanghai) Co., said by telephone today. “It’s part of a gradual process. QFII money still accounts for a very small fraction of China’s capital markets.”
I see two reasons for this move. First, as the China Securities Regulatory Commission has indicated, “introducing more long-term funds from abroad will help improve market confidence, promote stable growth in capital markets and provide ‘robust’ investment returns to domestic investors.”
Second, I see it as a way to make it easier for China’s SWF and SOEs to invest abroad. China has suffered from criticism that while its SOEs actively seek to invest in other markets, it is not very open to foreign investment itself. By reducing barriers to investment, especially by state actors, China takes away that argument and has a better position from which to argue for increased openness to state-controlled investors. China stands to gain as much from open investment policies as anyone.
In an earlier post I had hoped that Canada’s approval of the CNOOC deal signalled a move towards a UK-style openness to investment by foreign entities and, particularly, foreign state-controlled investors. I was wrong. If anything, Canada may be more hostile to state-controlled investor deals than the US. Here are some excerpts from a Business Spectator commentary:
Canadian Prime Minister Stephen Harper said the CNOOC and Petronas deals would mark an end to state-owned foreign companies being treated the same as private foreign companies. In the future, takeover offers from state-owned foreign companies will face a higher threshold for approval compared with takeover offers from private companies.
“Canadians generally, and investors specifically, should understand that these decisions are not the beginning of a trend, but rather the end of a trend,” Harper said at a hastily-organised press conference. “When we say that Canada is open for business, we do not mean that Canada is for sale to foreign governments.”
Harper is trying to send a clear message to investors, that although Canada’s oil sands are in need of significant foreign capital, Canada will be picky in choosing where that capital comes from.
“To be blunt, Canadians have not spent years reducing the ownership of sectors of the economy by our own governments, only to see them bought and controlled by foreign governments instead,” he said. “The government’s concern and discomfort for some time has been that very quickly, a series of large-scale controlling transactions by foreign-owned companies could rapidly transform this [energy] industry from one that is essentially a free market to one that is effectively under control of a foreign government.”
Currently, Canada’s oil sands account for 60 per cent of the world’s oil production that is not under the control of national oil companies. As assets in other parts of the world are snapped up, Canada fully expects state-owned companies elsewhere to increasingly turn their attention to Canada.
“The government of Canada has determined that foreign state control of oil sands development has reached the point at which further such foreign state control would not be of net benefit to Canada,” he added.
The big news over the weekend is that China is buying. First, a group of Chinese firms, led by New China Trust (which, as I review their website, appears to be a state-controlled enterprise), has agreed to buy 80% of ILFC. Here’s some details from a Reuters report:
American International Group Inc (AIG.N) is to sell nearly all of ILFC (ILFC.N), the world’s second-largest airplane leasing business, to a Chinese consortium for up to $4.8 billion, giving the fastest growing aviation market easier and cheaper access to planes.
Chinese firms have shown interest in aircraft leasing before, and the deal would give China access to a global network of about 200 airlines in 80 countries. China is already ILFC’s largest market with 180 planes operating there, giving it 35 percent market share.
“It’s the biggest deal we have in the aircraft leasing world and it’s very ambitious,” said Paul Sheridan, head of Asia at aviation consultancy firm Ascend Advisor. “We believe there are not enough aircraft on order in China at the moment. It will help Chinese airlines get more aircraft.”
The deal will be subject to CFIUS review. I believe that the deal will move through CFIUS quickly, particularly because the business would not seem to be related to national security as CFIUS defines that term.
A more difficult issue is presented by the sale of assets to the North American subsidiary of Wanxiang, a Chinese auto parts maker, which was the winning bidder in an auction for the assets of the bankrupt A123 Systems. Importantly, the sale of A123 assets will not include the company’s military contracts or other deals with the US government. The New York Times reports:
In addition to the approval of the bankruptcy judge, the deal requires the approval of the Committee on Foreign Investment in the United States, a broad-based group led by the Treasury Department that reviews foreign takeovers of American companies.
Mr. Ni expressed confidence that Wanxiang was the best owner for A123, when it would need considerable investment to meet production commitments for automakers like Fisker Automotive and General Motors. “We are committed to making the long-term investments necessary for A123 to be successful,” he said.
A123, which is based in Waltham, Mass., was once one of the most promising recipients of federal loans under the Obama administration’s $2 billion program to stimulate the electric-car industry in the United States.
These cases are important tests for CFIUS. The A123 deal had early resistance, as Reuters reported:
Senators John Thune and Chuck Grassley sent a letter on Tuesday to Energy Secretary Steven Chu questioning the continued investment in A123, the first official congressional inquiry into the company’s tie-up with a Chinese company.
“Billions of U.S. taxpayer dollars have flowed to foreign companies through the Recovery Act, and we are concerned that the recent announcement could lead to even more taxpayer dollars going overseas,” Thune and Grassley wrote in the letter.
They asked the Energy Department how it would handle the remainder of A123’s grant and whether the company would need those funds if the Wanxiang deal came to fruition.
The lawmakers also asked whether there were any assurances that U.S. government-backed intellectual property would not go to the Chinese company and if manufacturing jobs would remain in the United States.
Given the mitigation arrangement in place–no sensitive assets are going to be part of the deal–the national security issues seem to be moot. Once national security that is taken out of the equation, the primary focus of the directors as fiduciaries is to get the highest amount for the creditors.
I’m expecting these deals to go through, and I will be surprised and disappointed if they do not.
I have always viewed Canadians as existing in a cultural space between the British and Americans. In its reponse to foreign investment, Canada also seemed to fit in somewhere between the UK and the US. While the UK actively seeks sovereign wealth investment, and the US seems to shun it (except when desperate, as during the Financial Crisis), Canada has seemed not quite sure how it should respond. On the one hand, it appears to welcome Chinese interest; this was particularly apparent when the CIC set up its first foreign office in Toronto. On the other hand, Canada has dragged its feet on the CNOOC deal. I assume that suspicions held by its neighbor and largest trading partner (buying nearly 75% of its total exports), played some role in this hesitation.
Tonight, the Wall Street Journal reports that Canada seems to be looking across the pond, rather than across its Southern border, for inspiration on how to deal with state capitalists:
The Canadian government approved Cnooc’s $15.1-billion takeover bid for oil-sands operator Nexen, ending months of debate over the merits of what represents the biggest move by China into North America’s energy patch.
The deal, which has already won shareholder approval, still needs U.S. and British government sign-offs, since Nexen has significant assets in those two jurisdictions.
Canada also approved the $5.23 billion proposed deal by Malaysia’s Petroliam Nasional’s bid for Progress Energy Resources.