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GM Snubs Einhorn Dividend Share Proposal, Cites Rating Risk

March 28, 2017
“The proposed structure creates an unacceptable level of risk for our company and its shareholders,” said CEO Mary Barra.

General Motors Co. (IW 500/3) rebuffed David Einhorn’s proposal for a second class of common stock, setting up a potential battle with the hedge fund manager who believes the move would boost shareholder value by as much as $38 billion.

Einhorn’s Greenlight Capital LLC proposed GM introduce stock that would be entitled to the $1.52 a share dividend the company pays annually and trade separately from existing common stock.

The board for the automaker voted unanimously to reject the pitch, according to a company spokeswoman. Credit ratings firms bolstered GM’s argument that the move would be negative for the company.

“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. 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.”

Credit Impact

GM’s management and board talked with Einhorn about his proposal and other ideas, and directors concluded that guaranteeing a dividend even in a downturn could compromise the company’s investment-grade credit ratings, spokeswoman Joanne Krell said.

“The proposed structure creates an unacceptable level of risk for our company and its shareholders,” said CEO Mary Barra.

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.” Standard & Poor’s said it would treat the dividend shares as debt when calculating GM’s risk profile.

“This consideration could lead us to lower our ratings on the company below the investment-grade threshold,” S&P said.

After climbing as much as 4.4%, their biggest intraday jump in six weeks, GM shares traded up 2.9% to $35.73 as of 1:25 p.m. in New York trading.

Lagging Returns

While GM has boosted profit by 51% since its November 2010 initial public offering, total returns of just 20% trailed the 127% gain for the Standard & Poor’s 500 Index, Einhorn wrote. A dual share class would have an expected value of $43 to $60 a share.

Einhorn gained notoriety as a short seller by betting against lender Allied Capital Corp. for years and then Lehman Brothers Holdings Inc. before the investment bank’s 2008 collapse. Greenlight has held GM shares since early 2011, months after the largest U.S. automaker rebounded from government-backed bankruptcy with an initial public offering.

By David Welch

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