GM rejects pitch for dual stock classes

Melissa Burden
The Detroit News
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A large shareholder of General Motors Co. stock said Tuesday it has a plan it believes would “unlock substantial value” for GM shareholders by moving the Detroit automaker’s common stock into two classes: one that would receive dividends and another that would participate in earnings, cash flow and future growth.

GM quickly said Tuesday its board and management team “thoroughly analyzed and rejected” the proposal. It’s the second largest activist investor proposal to come to the company in two years.

Greenlight Capital Inc., a New York hedge fund that owns 52 million shares of GM, said the plan would not change the automaker’s business strategy or capital investment priorities. The fund said it believes GM could lower its cost of capital and unlock between $13 billion and $38 billion in shareholder value.

“As significant, long-term shareholders, we believe in GM’s strong earnings potential. Our plan would unlock significant value and lower GM’s cost of capital,” billionaire David Einhorn, president of Greenlight Capital, said in a statement. “It would provide the company complete strategic flexibility without adding any default, refinancing, or balance sheet risk. We encourage our fellow GM shareholders to carefully review the presentation and to urge GM’s management and board to adopt this compelling plan.”

Greenlight is seeking to submit the plan for a vote at GM’s annual shareholders meeting, typically scheduled in mid-June in Detroit. Greenlight also has nominated four candidates to stand for election on GM’s board. GM is not recommending any of the Greenlight candidates; the candidates have not been named by Greenlight or GM, but should be included in GM’s proxy which typically comes out in late April.

The automaker said it had 15 direct interactions with Greenlight over the past seven months, including a meeting between Greenlight and members of the GM board. GM said Greenlight’s proposal changed over time, but it believes Greenlight’s current proposal carries risks such as the loss of investment-grade credit rating and governance challenges for two classes of stock. The company said there could be unknown and uncertain market demand and liquidity for the proposed shares that could lead to lower share pricing and sell-offs of both stock classifications.

“After careful due diligence, including consultation with the rating agencies and independent analysis from three top-tier investment banks, the board and management are confident that eliminating the dividend on the existing GM common stock and distributing the proposed new ‘dividend security’ creates an unacceptable level of risk and would not serve the best interests of GM shareholders,” GM said in a news release.

“We’ve extensively reviewed the proposed dual-class structure, as well as other capital allocation strategies, and concluded that continuing to execute our strategy and adhering to our current disciplined capital allocation framework is the best path to deliver increased value,” GM Chairman and CEO Mary Barra said in a statement.

Greenlight, which recently increased its holding in GM, wants GM to earmark dividend shares that would pay tax-free quarterly dividends at the current annual amount of $1.52 a share, appealing to yield-focused investors. It also wants GM to create capital appreciation shares that would trade separately from the dividend shares and use existing common stock so that shareholders would benefit from earnings, cash flow, buybacks and growth in excess of the dividends. Greenlight says the shares would appeal to investors focused on GM growth.

The hedge fund says that creating the two classifications of stock would “force the market to appropriately value the dividend and give credit for GM’s earnings potential.” Greenlight says the dividend shares could be valued at $17-$22 a share, while the capital appreciation shares would be valued at $26-$38, a share, for a combined expected value of $43-$60 a share.

GM, in a 34-page investors presentation, called Greenlight’s proposal an “experiment in financial engineering” that it rejected. GM said the dividend shares would not help it sell more cars, drive higher profitability or generate more cash flow. The company said it does not address factors in the automotive industry that have affected GM’s stock price.

Losing investment grade status could cost $1 billion in earnings before taxes for the company’s finance arm GM Financial, put $1 billion in profit at risk for the automotive company and require $5 billion to $10 billion more of cash on the balance sheet, GM says.

Moody’s Investors Service said Tuesday if the proposal is adopted by GM shareholders, it would hurt credit ratings for GM and it subsidiaries, reduce the company’s financial flexibility and boost credit risk. S&P Global Ratings also said if GM were to create two classes of stock, it could lower GM’s credit ratings to below investment grade.

CFRA Research, in an investors note Tuesday, agreed with GM’s rejection of the hedge fund’s proposal. “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.

Einhorn said Tuesday on CNBC that he believes GM misrepresented information Greenlight had shared with them to the ratings agencies, approaching it “like a 7-year-old confronted with a plate of raw oysters.”

Shareholders have long criticized GM for its stock price, which is trading only slightly above its 2010 initial public offering price of $33 a share, despite record earnings from the company.

GM stock closed up nearly 2.5 percent Tuesday to $35.56 a share.

In March 2015, GM announced a $5 billion share buyback program to avoid a public standoff with a group of major investors. A group of hedge fund investors that included Harry J. Wilson, a former President Barack Obama auto adviser, had sought a $8 billion stock buyback. Wilson then agreed to withdraw his request for a GM board seat.

GM finished its original $5 billion share repurchase program in 2016, the same year it announced plans to buy another $4 billion in stock by the end of 2017. In January, GM added an additional $5 billion in share repurchases with no expiration, bringing the total to $14 billion.

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