Investor David Einhorn unveiled Tuesday a proposal Tuesday to try to boost General Motors share price by creating two classes of stock, signaling a possible battle at the carmaker's annual meeting.
According to the report, Einhorn wants GM to create two different classes of common stock and separate the company's dividends from the rest of its earnings.
The plan would lower the company's cost of capital and unlock between $13 billion and $38 billion of shareholder value, Greenlight Capital said. But the company says that its board and management have analyzed the plan and decided against it. "Our plan would unlock significant value and lower GM's cost of capital", said billionaire David Einhorn, president of Greenlight Capital, in a statement. 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.
To add more pressure on the company, Einhorn has said he wants to nominate directors but would not identify them.
The shift "could lead us to negatively revise our assessment of the company's financial risk profile" because the firm would lack flexibility to eliminate or reduce the dividend if need be, S&P said.
GM is rebuffing Einhorn's suggestion too.
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GM values the views of its owners, and has engaged directly with Greenlight on numerous occasions during the past seven months, including a meeting between Greenlight and members of the company's Board.
But GM said in a statement Tuesday that the proposal creates "unacceptable risks" and is not in the best interests of shareholders.
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.
Einhorn's is buying GM - Greenlight holds about 1% of the available shares, with options to take that 2.5% - but he isn't buying Barra and her executive team's financial strategy.
The proposal could hinder GM's investment-grade credit rating, and the demand for a second class of shares is unknown, uncertain, and highly speculative. Ford Motor Co.'s stock, for instance, is trading at almost ten times earnings, while GM is at just under 5.8 times. Regardless of whose side you agree with more, GM management or Greenlight Capital, we think the discussion itself is a potential catalyst for the realization of a higher valuation for General Motors. Since then, GM has increased its earnings - profit reached $9.4 billion a year ago - and paid out more in dividends and stock repurchases.
GM said it expects to return about $7 billion in cash to shareholders in 2017, bringing total cash returns to about $25 billion since 2012.