Unlocking Value at GM: Two Classes of Common Shares, March 28, 2017
- Greenlight Capital, a value-oriented and research-driven investment firm, has been a long-term stock holder of GM and believes in GM’s prospects and opportunity for long-term value creation
- GM’s stock is not fairly valued today:
- Stock trades at a significant discount to intrinsic value despite strong operations
- Current P/E multiple of 5.6x is the lowest in the S&P 500
- Dividend yield of 4.4% is very high relative to overall market and to GM’s conservative payout ratio of 24%; GM’s dividend not respected by the market
- Investor base has a suboptimal combination of yield-oriented and value-focused shareholders with divergent investment objectives
- Despite strong operating performance of 51% growth in adjusted operating income from 2011 to 2016, shareholders have not been rewarded since the 2010 IPO (despite an equity bull market)
- Since November 2010, S&P 500 cumulative total returns of 127% versus GM’s 20%
- Believe there is a solution to unlock value that does not affect GM’s underlying operations or financial flexibility
- Distribute, on a tax-free basis, a second class of common stock (“Dividend Shares”)
- Dividend shares would be entitled to today’s dividend ($1.52 per year)
- Would trade separately from existing common stock
- Existing common stock (“Capital Appreciation Shares”) would be entitled to earnings in excess of dividends declared on the Dividend Shares, including all future growth
- Creating two classes of common stock will unlock GM’s value by forcing the market to appropriately value the dividend and give credit for GM’s earnings potential
- Distribute, on a tax-free basis, a second class of common stock (“Dividend Shares”)
- Valuing the Dividend Shares:
- Our solution will lead to GM being more fairly valued in the capital markets
- Dividend Shares will be attractive to yield-oriented investors
- Our work indicates that they will trade with a 7-9% yield
- Valuing the Capital Appreciation Shares:
- Capital Appreciation Shares will be attractive to value- and growth-focused investors
- Believe they will be valued based on P/E multiple and we value them conservatively at the current depressed P/E multiple
- Multiple expansion should occur because planned buybacks would but more Capital Appreciation Shares than today’s common stock due to a reduced absolute share price
- More effective buyback will accelerate EPS growth, resulting in a higher P/E
- Valuing the Two Classes:
- Combined value of the Dividend Shares and the Capital Appreciation Shares leads to significant price appreciation compared to the current share price of $34.71 (as of 3/27/17)
- Benefits:
- Our plan does not affect GM’s corporate strategy and will improve its financial flexibility
- Not advocating for any change to GM’s capital allocation policy (balance sheet cash, dividends or share repurchases)
- Our solution will lower GM’s cost of capital and improve its access to capital
- Our solution will enhance value for shareholders and attract new investors to GM’s common stock
- Our plan will unlock between $13 billion and $38 billion of shareholder value through appropriate valuation of GM’s dividend and earnings potential
David Einhorn is the founder of Greenlight Capital, a long/short hedge fund with an estimated AUM of over $10 billion as of 2015.
Image Source: Greenlight Capital Presentation, March 28, 2017
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