General Motors Co. (NYSE: GM) confirmed today that its Board of Directors and management team have thoroughly analyzed and rejected a non-binding proposal that Greenlight Capital intends to submit for a vote at GM’s 2017 annual meeting of shareholders. The proposal relates to eliminating the dividend on the existing GM common stock and distributing an unprecedented new dividend-focused security (“dividend security”), thereby creating a dual-class common stock structure. In connection with its proposal, Greenlight has also nominated a slate of four candidates for election to GM’s Board of Directors.
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. After careful due diligence, including consultation with the rating agencies and independent analysis from three top-tier investment banks, the Board and management are confident that eliminating the dividend on the existing GM common stock and distributing the proposed new “dividend security” creates an unacceptable level of risk and would not serve the best interests of GM shareholders.
These risks include:
- The loss of GM’s investment grade credit rating;
- Unknown and uncertain market demand and liquidity for the proposed securities, resulting in depressed pricing and selling pressure;
- Unproven and entirely speculative valuation impact; and
- Material governance challenges arising from two classes of stock with divergent objectives.
“GM’s Board and management are fundamentally transforming our company by executing a plan that is delivering record financial and operating results and returning significant capital to our shareholders,” said Mary Barra, GM chairman and CEO. “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.
“Our Board and management remain laser focused on advancing our progress and creating value for our owners by enhancing our portfolio and our operations, leading the future of personal mobility and driving strong performance. In contrast, the proposed structure creates an unacceptable level of risk for our company and its shareholders,” concluded Barra.
The Board’s conclusions are summarized below and in an investor presentation available at http://media.gm.com/content/dam/Media/gmcom/investor/2017/mar/GM-chart-set.pdf.
- 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. The proposed dividend security would not help GM sell more cars, drive higher profitability, or generate greater cash flow — nor would it address the fundamental sector factors affecting GM’s stock price.
- GM believes that implementation of the proposed dual-class structure would lead to a loss of the company’s investment grade credit rating.
- 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.
- 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.
- 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;
- Distribution of a large volume of an unprecedented security that has no established market depth or liquidity would likely also lead to selling pressure on the proposed “dividend security,” resulting in likely depressed pricing for the new security; and
- The proposed structure could create complex governance challenges, requiring the Board and management to consider and respond to divergent expectations and interests of owners of two distinct classes of stock in GM’s strategic and capital allocation decision making.
GM Recommends Electing Its Strong Slate of Directors
Together with Greenlight’s dual-class common stock proposal, the company also received notice of Greenlight’s intent to nominate a slate of four candidates for election to GM’s Board. GM has a highly experienced Board with relevant expertise and capabilities in key areas that align with the company’s strategic direction. After evaluating Greenlight’s nominees, including the connection between Greenlight’s nominations and its dual-class stock proposal, the Board, on the recommendation of its Governance and Corporate Responsibility Committee, has unanimously determined not to recommend any of Greenlight’s nominees for election to the Board. The Committee’s and Board’s assessment of the nominees’ skills and qualifications followed the process and took into account the considerations described in the “Director Nomination Process” section of the Company’s most recent proxy statement.
Overview of Recent Strategic Actions and Results
- Opel/Vauxhall Transaction to Improve Financial Metrics, Allow Greater Share Repurchases – As another major step in its ongoing work to deploy resources to higher-margin, higher-return opportunities, earlier this month, GM announced an agreement to sell GM’s Opel/Vauxhall subsidiary and GM Financial’s European operations to PSA Group. Upon closing, the transaction is expected to immediately improve GM’s EBIT-adjusted, its EBIT-adjusted margins and its adjusted automotive free cash flow, thereby reducing the cash balance requirement under GM’s disciplined capital allocation framework by $2 billion. 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.
- Strong 2017 Outlook – Earlier this year, prior to the Opel/Vauxhall announcement, GM announced that it expects to deliver full-year 2017 EPS-diluted and EPS-diluted-adjusted of $6.00-$6.50; maintain or improve EBIT-adjusted and EBIT-adjusted margins; and generate higher revenues, compared to 2016. GM also indicated that it expects to generate about $15 billion in automotive operating cash flow and about $6 billion in adjusted automotive free cash flow.
- Approximately $25 billion in cash to shareholders – Based on this strong outlook, the GM Board approved an additional $5 billion in common stock repurchases under the company’s existing share repurchase program. The new authorization brings the total share repurchase program to $14 billion since it was announced in March 2015. 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. GM expects to return approximately $7 billion in cash to shareholders in 2017, bringing total cash returns to shareholders to approximately $25 billion since 2012. This represents approximately half its current market capitalization and more than 90% of its adjusted automotive free cash flow over the same period.