GM to buy back $5 billion in shares

Michael Wayland and David Shepardson
The Detroit News

General Motors Co. said Monday it will buy back $5 billion in company shares after reaching a deal with activist investor Harry J. Wilson, who will withdraw his request for a board seat and shareholder proposal.

The buyback will begin immediately and continue through the end of 2016, GM said. It said a foundational element of its approach will be to return all available free cash to shareholders while maintaining an investment-grade balance sheet.

Wilson, a former senior member of the Obama auto task force, had sought a board seat and asked the Detroit-based automaker to buy back $8 billion by the middle of next year. He is working with a group of hedge funds that own about 31.2 million shares, or 1.9 percent, of GM stock.

Both parties — GM and Wilson — called the announcements a result of “constructive dialogue” that will return capital to shareholders.

“We really believe this is the right framework for the company, as we continue to execute our plan to become the most valued automotive company,” GM CEO Mary Barra said during a briefing with news media Monday at the company’s headquarters in Detroit.

Wilson, in a statement, called the situation a “win-win” for GM and investors. He thanked Barra, senior management and the GM Board “for their engagement and focus on these important issues and for working toward a mutually successful outcome.”

GM and Wilson held talks in recent weeks and on Friday GM made its proposal for the $5 billion buyback. The sides then held further talks over the weekend in which Wilson agreed to abandon a proxy fight and request for a board seat.

Citi analyst Itay Michaeli said the buyback is equivalent to about 8.3 percent of GM’s outstanding shares and “should respond well to the news.” He has a $49 price target on GM shares. GM shares are up 89 cents a share, or 2.4 percent, to $37.73 in pre-market trading.

GM ended 2014 with $25.2 billion in cash, down from $27.9 billion at the end of 2013. The difference was essentially the dividend GM pays to shareholders. But GM faces several unknowns including an ongoing Justice Department investigation into its delayed recall of 2.6 million vehicles for ignition switches linked to at least 57 deaths. GM could be forced to pay billions to settle the investigation, Wall Street analysts have said. GM also faces labor talks later this year on a new contract.

GM Chief Financial Officer Chuck Stevens said a $20 billion cash target for GM is “appropriate at this time” to maintain operations: At least $8 billion in operating cash; $10 billion-$11 billion to protect against an average recession; and $1 billion-$2 billion to maintain its investment-grade rating. He said the company will look to bring down that target as the company gets more efficient.

The $5 billion share buyback is in addition to GM last month saying it plans a 20 percent increase of its quarterly dividend to 36 cents per share. The company expects to pay about $5 billion in dividends through 2016.

“We’ve been consistently evaluating our capital allocation framework,” said Stevens, adding the $5 billion share buyback is an “initial manifestation” of its capital allocation framework.

Stevens said the company does not expect its announcements on Monday to negatively or positively impact any of its current credit ratings.

Moody’s Investors Service said it would not downgrade GM on the buyback or change its outlook but said it “represents a negative credit development.”

“This program weakens GM’s positioning at the current rating level and will likely delay any potential consideration for an upgrade,” said Bruce Clark, senior vice president with Moody’s.

Higher ratings are important to GM because of the significant ongoing borrowing requirements of its captive finance unit GM Financial, Moody’s said.

Fitch Ratings was more optimistic on the buyback, saying it doesn’t plan to change GM’s credit rating or outlook. The firm said it expects GM’s cash reserves to remain adequate “despite its plan to return a significant level of cash to shareholders over the next two years.”

GM also faces challenges including weak automotive markets in Latin America, Russia and many markets in South East Asia. It will also face the UAW in contract talks after saying it has agreed to making much bigger payments to shareholders, the rating agency said.

Many GM shareholders aren’t happy with GM’s low stock price and analysts say the company is undervalued. GM stock closed Friday down 77 cents to $36.84 per share.

The automaker last month said it plans a 20 percent increase of its quarterly dividend to 36 cents per share. The company expects to pay about $5 billion in dividends through 2016.