Einhorn Wants GM to Create Two Classes of Stock -- 2nd Update
March 28 2017 - 11:34AM
Dow Jones News
By David Benoit and Mike Colias
General Motors Co. is facing pressure from investor David
Einhorn to boost its languishing stock price.
Mr. Einhorn's Greenlight Capital Inc. wants the auto maker to
split its common stock into two classes: one that pays dividends
and a second that would entitle its holders to all earnings,
including stock buybacks, after the dividend is paid, according to
people familiar with the matter.
Greenlight believes the move could attract new investors who are
willing to pay more for potential earnings growth, potentially
boosting the auto maker's market capitalization by as much as $38
billion, the people said. GM's market value currently stands at
around $52.2 billion, according to data provider FactSet, and
currently pays an annual dividend of $1.52 per share.
A GM spokeswoman called the proposed share structure
"unprecedented and untested" and said it creates risks that are
"unacceptable" and "aren't in the best interest of our
shareholders."
Mr. Einhorn believes GM isn't getting credit for either its
earnings potential or its dividend payouts, the people said.
GM has benefited from an unprecedented seven-year rise in U.S.
auto sales since the financial crisis, while prolonged low gas
prices have fueled demand for the company's high-margin pickup
trucks and SUVs. The nation's largest auto maker posted $12.5
billion in operating profit last year -- its second straight record
-- with the lion's share coming from North America, its primary
truck market.
Yet its shares trade only about 6% above the price investors
paid when it returned to the market in 2010 after its
government-backed bankruptcy. The stock trades at the lowest
valuation in the S&P 500, measured by the price compared to its
expected earnings-per-share. Its dividend yield, meanwhile, is
among the top 25 in the index.
Mr. Einhorn believes GM's management is doing a good job
operating the business and isn't pushing GM to change its capital
spending plan, as other investors have previously, the people
said.
Greenlight has been a GM investor at various points for about
five years and had a 0.9% stake and options on 25 million shares at
the end of December.
Investors have pressured GM in recent years to find a way to
improve its stock performance. The auto maker, which returned to
the public markets on November 2010 at $33 a share, closed Monday
at $34.71.
Mr. Einhorn estimates the dividend stock could trade between $17
and $22 and the remaining stock could trade at $26 to $28,
according to people familiar with the plan.
At those levels, the stock gains could total between $12 billion
and $38 billion.
"We don't know if there will be market demand and liquidity for
the proposed securities," said GM spokeswoman Joanne Krell. She
said Mr. Einhorn's proposed setup could endanger its
investment-grade credit rating, among other risks.
Mr. Einhorn has made a career pushing what he sees as
misunderstood stories on Wall Street, arguing that Lehman Brothers
Holdings Inc. was overvalued months before its collapse and
successfully pushing Apple Inc. to implement a $100 billion capital
return plan.
His campaign comes just two years after GM fended off a proxy
fight led by a group of hedge funds and Harry J. Wilson, an Obama
administration official who ushered GM through bankruptcy in
2009.
GM responded with a $5 billion stock buyback plan. It also
detailed to investors the return it expected on its own spending,
tying executive compensation to return on invested capital, a
favorite metric of hedge funds and other investors. GM said that
above a $20 billion cushion, it would return to shareholders any
cash that it couldn't put to work for at least a 20% return.
The moves persuaded the investors, a group that included
Appaloosa Management LP and Hayman Capital Management LP, to drop
their push to add Mr. Wilson to GM's board.
Despite GM's healthy results in recent years, investors are
cautious as U.S. vehicle sales show signs of peaking. Analysts say
they want to see evidence that GM can remain solidly profitable in
the next market downturn.
GM has said it has positioned the business to remain profitable
even if U.S. industry sales fall below 11 million light vehicles
from the 17.5 million sold last year. Most forecasts show sales
remaining in the 16 million to 17 million range for the next
several years.
Write to David Benoit at david.benoit@wsj.com and Mike Colias at
Mike.Colias@wsj.com
(END) Dow Jones Newswires
March 28, 2017 11:19 ET (15:19 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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