Published: Wed, April 05, 2017
Economy | By Melissa Porter

General Motors rejects investor plan for 2 stock classes

General Motors rejects investor plan for 2 stock classes

General Motors says it has rejected a proposal from investor David Einhorn to split its stock into two classes. This increase in stock repurchases serves as further evidence of GM's commitment to driving shareholder value through strong cash returns to its owners enabled by strong business results.

"Our plan would unlock significant value and lower GM's cost of capital", Einhorn said in a statement.

It would also limit GM's financial flexibility and adversely affect the company's risk profile, including GM's ability to execute its captive finance strategy, access capital markets efficiently and execute revolver renewals.

- Einhorn also has said he wants to nominate directors to GM's board.

Einhorn believes that the dividend shares would be valued at $17 to $22, attracting income investors with a 7% to 9% yield, while the capital appreciation shares could be worth $26 to $38. 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". Under the non-binding plan, GM would eliminate the dividend on its existing common stock and create a separate dividend-paying security. The current shares ("capital appreciation shares") would be entitled to excess company earnings and would be the vehicle of choice for growth-oriented value investors.

Moody's Investors Service said adopting Greenlight's plan would be credit negative for GM and "a significant departure from the company's current financial strategy". He argues that the current capital structure attracts shareholders who are satisfied with modest performance as long as the dividend yield stays healthy. One thing Einhorn didn't even touch on was the benefit of GM's recently increased share-buyback program, which was increased by $2 billion thanks to its cash-saving exit from Europe.

"As Greenlight has already acknowledged, the proposed dual-class common stock structure would have no positive effect on GM's underlying business or cash flows, and therefore would not create additional intrinsic value", GM said in a statement.

In a regulatory filing, the country's largest automaker said that the proposal "would not help GM sell more cars, drive higher profitability, or generate greater cash flow".

The company also said that its board unanimously decided against recommending any of Greenlight's board candidates.

GM said its management has spoken with Greenlight numerous times during the past seven months, including a meeting between the hedge fund and GM's board.

GM believes that implementation of the proposed dual-class structure would lead to a loss of the company's investment grade credit rating. 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.

The Detroit automaker has had a history of activist investors seeking more from the stock. The stock has now gained 3% year to date, while the S&P 500 has tacked on 5.2%. 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%.

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