Einhorn's Greenlight Capital urges GM to create two share classes

Jon Howard
April 5, 2017

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

Einhorn's Greenlight Capital, which is estimated to hold less than one percent of General Motors shares, proposed splitting General Motors common stock into two classes, one that would receive the dividends and the other that would be tied to remaining earnings and future cash flow. In connection with its proposal, Greenlight has also nominated a slate of four candidates for election to GM's Board of Directors.

"For seven months, 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 Mary Barra said in the statement. Greenlight believes that adopting the Plan would lower GM's cost of capital, improve its financial flexibility, and unlock between $13 billion and $38 billion of shareholder value.

"GM's dividend is not respected by the market", Einhorn, the president and co-founder of Greenlight, said in slides posted on the hedge fund's website.

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.

GM's CEO Mary Barra nixed the plan, but shares were still up 3% on the news.

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A non-investment grade rating would have an approximately $1 billion EBT impact on GM Financial, put $1 billion of profit at risk for the automotive company and necessitate approximately an additional $5-$10 billion of cash on the GM balance sheet.

But GM said in a statement Tuesday that the proposal creates "unacceptable risks" and is not in the best interests of shareholders.

In fact, he wouldn't be surprised if GM went private or someone buys the company.

Einhorn said GM's stock price has languished for years since emerging from the 2009 bankruptcy and is now trading at the lowest valuation in the S&P 500 stock index. According to Greenlight, dividing General Motors shares into "dividend shares" and "capital appreciation shares" would divide investors into two groups with different goals: incomefocused investors, and value- and growth-focused investors. Among the risks are the potential loss of GM's investment grade credit rating, unknown market demand for the new securities that could depress prices, and corporate governance challenges that would come from having two classes of stock with competing objectives.

The hedge-fund boss wants the automaker to split its shares into one class that collects dividends and another reliant on growth.

Yield-oriented investors want to maximize their dividend income. Greenlight has held GM shares since early 2011, months after the largest US automaker rebounded from government-backed bankruptcy with an initial public offering. It probably won't happen: General Motors already offered its own rebuttal, while Barron's Jack Hough argued that the company would be better off waiting for the next downturn to show it can continue to turn a profit even during the bad times. Greenlight has held GM shares since early 2011, months after the largest US automaker rebounded from a government-backed bankruptcy with an initial public offering. While the company's operations have been performing well, GM's stock has disappointed investors in recent years. It pays an enticing 4.4%, more than double the average 2% yield of the S&P 500. 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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