Earlier this week, General Motors has officially (yet courteously) declined Greenlight Capital’s proposal to create a dual-class common stock arrangement. The non-binding proposal suggested eliminating the dividend on existing GM common stock while creating a new dividend-focused security, an unprecedented instrument. After a seventh-month-long due diligence in reviewing the proposal, GM stated that the proposal would create “an unacceptable level of risk and would not serve the best interests of GM shareholders.”
In its official reply to the proposal, General Motors stated that the motion carried several risks, including:
- 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
Instead, the automaker believes in continuing with its current strategy of delivering record financial performance and capital return to shareholders. GM has provided the following three examples to show the actions and results it has undertaken or achieved to reach those objectives.
1. Opel/Vauxhall Sale
As a major step in its ongoing work to deploy resources to higher-margin, higher-return opportunities, GM announced an agreement in early March to sell its Opel/Vauxhall subsidiary and GM Financial’s European operations to PSA Group. Upon closing, the transaction is expected to immediately improve financial metrics and greater share repurchases.
Specifically, the transaction will cause GM’s EBIT-adjusted, EBIT-adjusted margins and adjusted automotive free cash flow to improve, thereby reducing the cash balance requirement by $2 billion under GM’s disciplined capital allocation framework.
The company intends to use the newly-available 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.
2. Strong 2017 Outlook
Earlier this year, prior to the Opel/Vauxhall sale announcement, GM announced that it expects to deliver full-year 2017:
- Earnings per Share (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
The company 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.
3. Return Approximately $25 billion In Cash To Shareholders
Based on the strong 2017 outlook, the GM Board approved an additional $5 billion in common stock repurchases under the company’s existing share repurchase program.
This new authorization brings the total share repurchase program to $14 billion since it was announced in March 2015, serving as further evidence of GM’s commitment to driving shareholder value through strong cash returns to its owners enabled by strong business results.
In 2017, GM expects to return approximately $7 billion in cash to shareholders, bringing total cash returns to shareholders to approximately $25 billion since 2012. This represents approximately half of the company’s current market capitalization and more than 90 percent of its adjusted automotive free cash flow over the same period.
The GM Authority Take
To us, these primary examples show very clearly that General Motors is doing what it can, in the confines of real market pressures and existing safeguards to protect its financial integrity, to deliver record financial performance and capital return to shareholders.
Just ten years ago, the sale of Opel/Vauxhall was unimaginable, as the division was considered a sacred cow within GM. Also unimaginable a decade ago was the phrase “record financial performance” in association with GM. Today, the automaker is posting records on what is nearly a yearly basis.
For its part, Greenlight Capital — led by well-known investor David Einhorn — will still try to ratify its proposal and get four seats on GM’s Board at the company’s upcoming 2017 shareholders meeting. His fund holds just over 3 percent of GM common stock.
Stay tuned as we bring you ongoing coverage of Greenlight’s proposal right here at GM Authority.