General Motors (GM) Stock: Greenlight Proposal Rejected

by Frankie Norman April 5, 2017, 1:00
General Motors (GM) Stock: Greenlight Proposal Rejected

General Motors Company (NYSE:GM) will soon be split into two publicly traded stocks, if David Einhorn has his way.

The company said Tuesday that the plan from Einhorn's Greenlight Capital hedge fund would eliminate the dividend on existing common stock and create a new dividend-focused security.

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 company described the plan as unprecedented.

The company also said that its board unanimously decided against recommending any of Greenlight's board candidates. It said investors have not reaped adequate rewards since the automaker's public stock offering in 2011.

General Motors noted that elimination of the dividend on GM's existing common stock would likely lead to selling pressure by a significant universe of institutional owners and cause concern and confusion among retail holders, resulting in downward pressure on its share price.

Warren Buffett, one of GM's biggest shareholders, has not weighed in on the plan and was not immediately available for comment. Let's take a look at the proposal and what it could mean for GM investors. Some investors, he said, care only about the dividends, while others care only about the company's earnings.

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.

Losing the investment-grade credit rating would raise borrowing costs at GM Financial, the company's in-house financing arm.

Both investors were spurred by the same issue: even as auto sales have surged, and the broader stock market has enjoyed a historic bull run, GM shares have mostly done nothing.

Greenlight Capital holds 0.88% of General Motors shares, with the holding valued at more than $450 million.

News about the decision to sell GM Europe drove the stock price to $38.23 - its highest level in almost 12 months - but the stock price declined after the sale was announced to close at 34.71 on Monday. The agencies said that the dividend shares would be treated as debt for credit metric purposes and GM would lose their investment grade rating.

The discrepancy also shows why the Detroit automaker continues to be a tempting target for activist investors, hedge funds and merger-minded rivals.

"Despite fundamentally strong operations, the stock trades at a significant discount to intrinsic value", Einhorn writes, noting that GM's PE ratio is the lowest in the entire S&P 500. GM said the dividend shares would not help it sell more cars or drive higher profitability or generate more cash flow and it does not address factors in the automotive industry that have affected GM's stock price. The company intends to use these funds to accelerate share repurchases, subject to market conditions, increasing its total 2017 cash returns to shareholders to approximately $7 billion, comprising approximately $2 billion of dividends and approximately $5 billion of share repurchases.

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