Why GM Is Glad the Feds Are Selling

General Motors (NYSE: GM  ) and the U.S. Treasury Department announced�on Wednesday morning that they have agreed to a plan under which Treasury will sell its 500 million shares of GM stock by March of 2014.

GM, which has agreed to pay $5.5 billion for them, will immediately buy 200 million of those shares. That's a premium of about $2 a share over Tuesday's closing price. Details of Treasury's plan for selling its remaining shares will be announced�next month.

The market reacted very favorably to the announcement, with GM shares up over 8%�at midday on Wednesday. But some sort of sale has been expected for awhile. Why did shares jump so much?

A deal designed to reassure investors
The news of some sort of sale isn't much of a surprise. I've been predicting for months that some action would be taken once the election was over, and I'm far from alone. GM CEO Dan Akerson and other executives have clearly been itching to get the government to sell for some time now.

But the specifics of this deal were a surprise. By agreeing to buy 40% of the government's shares up front � at a premium � GM is doing two things, both of them good for its stock's prospects.

First, it's taking those 200 million shares off the market and ensuring that the sales won't drive prices down by diluting current shareholders' holdings. Second, by paying a premium, GM is going some way toward paying back the debt it is perceived to owe to taxpayers.

That's important, because the government is still underwater on the $49.5 billion "investment" it made to bail out GM in 2009. Before Wednesday's announcement, GM had repaid about $23.1 billion of that sum:

• $6.7 billion in cash, the last of which was paid in April of 2010
• $13 billion via GM's IPO, when the government sold about 45% of its stock holdings
• $2.1 billion, when GM bought back some preferred stock from the Treasury in late 2010
• About $800 million in interest and dividends on loans and preferred stock

That left over $25 billion still unpaid, with the government still holding 500 million shares... worth around $13 billion at recent prices. A full sale of the Treasury Department's shares at market prices would have left taxpayers over $12 billion in the hole, and that would have been a PR problem for both GM and the Obama administration.

By agreeing to pay a premium, even a relatively small one, GM goes some way toward closing that gap. And by structuring the deal in a way that was intended to reassure investors and boost the stock price, it's likely that GM and Treasury will have closed the gap even further once Treasury starts selling its remaining shares next year.

It's still "Government Motors," but not for much longer
Next month, Treasury will release its plan for selling its remaining 300 million shares. Those shares are likely to be sold in a series of (relatively) small sales, so as to avoid putting significant downward pressure on GM's share price. GM officials said on Wednesday that the company doesn't expect to buy those shares.

Today's deal includes a few additional provisions. Under the terms of the 2009 bailout, GM's executive salaries were sharply limited, and the company had to give up certain perks including its corporate jets. Treasury hasn't waived the salary limits � yet � but it did agree that GM could start using corporate aircraft again.

That was a provision Akerson and his team were said to have dearly wanted, as they frequently travel between Detroit and GM's far-flung regional offices in places like Germany and Shanghai, though CFO Dan Ammann said the company has no current plans to buy or lease corporate aircraft. Treasury also agreed to waive a condition that required GM to maintain certain manufacturing volumes in the U.S., but GM is already exceeding those by a considerable margin and plans to continue.

Ammann told reporters on Wednesday that there are "ongoing discussions" with Treasury about the salary restrictions, so further action is possible.

The upshot: a much-needed process is finally under way
While time will tell, the plan announced on Wednesday clearly looks like good news for GM shareholders. Not only did the structure of the deal give shares an immediate boost, the news of the sale itself removes a significant thorn from GM's side.

The government's stake in GM has weighed on the company's share price. It has probably cost GM some sales as well, as rivals like Ford (NYSE: F  ) and Toyota (NYSE: TM  ) have gained ground at the General's expense.

While it may be another year or more before the "Government Motors" era finally comes to a close, the fact that the end is finally in sight seems like relief for the General and its shareholders.

It's true that decades of mismanagement of General Motors led to a painful bankruptcy in 2009, but�it emerged a leaner, stronger company. GM's turnaround, however, is still a work in progress. Investors around the world are wondering if GM has what it takes to reclaim its former glory. I've put together a brand-new premium research report telling you what you need to know about GM and its turnaround. If you own or are thinking about owning GM, then you don't want to miss this report. Click here now to get started.