Activist Greenlight's Einhorn Wants New GM Capital Structure

Apr 05, 2017, 00:52
Activist Greenlight's Einhorn Wants New GM Capital Structure

Einhorn, making comments after the hedge fund urged GM to split its common stock into two classes , said the automaker's stock is confronting a very unusual dynamic. Creating a second class of shares would "unlock GM's value by forcing the market to appropriately value the dividend and give credit for GM's earnings potential".

"Our plan would unlock significant value and lower GM's cost of capital", Einhorn said in a statement. "Our plan. would provide the company complete strategic flexibility without adding any default, refinancing, or balance sheet risk", Einhorn said.

After studying Einhorn's proposal for seven months, GM rejected the plan as well as his goal of getting four seats on GM's board. The GM Dividend Shares would be entitled to the current annual dividend of $1.52/share. His All Cap Value Fund owns 300,000 shares of GM. The proposal relates to eliminating the dividend on the existing GM common stock and distributing an unprecedented new dividend-focused security, thereby creating a dual-class common stock structure.

Greenlight said that GM's stock price has been undervalued for years.

GM stock is up 2.4% Tuesday.

The proposal doesn't address the fundamental factors driving GM's valuation lower - such as plateauing USA sales, as well as capital required to develop electrified vehicles, smart mobility strategies, and driverless vehicle technology in a changing industry.

In addition, General Motors Company (NYSE:GM) said its board has decided not to recommend any of Greenlight's nominees for election to the board.

In fact, he wouldn't be surprised if GM went private or someone buys the company. The agencies said that the dividend shares would be treated as debt for credit metric purposes and GM would lose their investment grade rating. Yet General Motors' executive team and board of directors found otherwise, leading them to reject the proposal. The payout, the dividend yield, which is more than 4 percent. puts it among the highest. "We believe it would add unneeded complication and confusion for shareholders, while offering little value-add to GM's operational performance", Efraim Levy, equity analyst, wrote in the note. His proposal on Tuesday to split GM stock into two classes - summarily dismissed by GM - underscores the challenges Ms. Barra faces in translating GM's enviable financial results into a higher stock price. In March 2015, GM announced a $5 billion share buyback program to avoid a public standoff with a group of major investors. Wilson then agreed to withdraw his request for a GM board seat. Ford Motor Co.'s stock, for instance, is trading at almost ten times earnings, while GM is at just under 5.8 times. In 2017, the company plans to buy back about $5 billion of stock, which would allow it to shrink its share count by almost 10%. GM expects to return approximately $7 billion in cash to shareholders in 2017, bringing total cash returns to shareholders to approximately $25 billion since 2012.

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