Bloomberg News

GM’s $27 Billion Cash Hoard Seen Tempting Activists: Real M&A

November 26, 2013

General Motors Headquarters

General Motors Co. already trades at a valuation that’s cheaper than 97 percent of its peers, including Ford Motor Co., according to data compiled by Bloomberg. Photographer: Jeff Kowalsky/Bloomberg

General Motors Co. (GM:US) will be a tempting target for activist investors if it doesn’t quickly return cash to shareholders from what the automaker calls its “fortress balance sheet.”

The U.S. Treasury Department said last week it expects to sell its remaining 31.1 million GM common shares (GM:US) by year-end, depending on market conditions, to end an almost half decade of government oversight. The exit makes GM a possible target for activist investors, who may push the company to pay out some of its $26.8 billion in cash through a dividend or stock buyback, said Harry J. Wilson, a member of the U.S. auto task force that helped rebuild the automaker in a 2009 bankruptcy.

“Any company that isn’t efficient about capital allocation is a target for activists,” said Wilson, who is now a restructuring adviser at Maeva Group LLC in Westchester, New York. “GM has a huge cash hoard (GM:US) and they are generating lots more cash each year, so they need to be thoughtful about that.”

GM already trades at a valuation that’s cheaper than 97 percent of its peers, including Ford Motor Co. (F:US), according to data compiled by Bloomberg. Analysts project (GM:US) the company will generate $5.4 billion in free cash flow in 2014, double last year’s figure. A push to give shareholders some of its cash, built up during the government-backed bankruptcy and restructuring, would clash with some of Chief Executive Officer Dan Akerson’s goals to maintain spending on new products and buy back preferred shares left after the bankruptcy.

‘Government Motors’

“We expect to continue to reinvest in the business, maintain our fortress balance sheet and return cash to shareholders,” GM spokesman Dave Roman said in an e-mailed statement, when asked about the potential for an activist investor to come in and about priorities for the company’s cash.

The U.S. government’s stake in Detroit-based GM has fallen to about 2.2 percent and was valued at about $1.2 billion yesterday. The Treasury said last week that it has recovered $38.4 billion of the $51 billion it spent to bail out and restructure GM, which earned the nickname “Government Motors.”

While the government’s control over GM was minimal from an official standpoint beyond approving executive compensation, there was always suspicion they might have had more influence behind the scenes on decisions the company was making, said Michelle Krebs, a Southfield, Michigan-based analyst at Edmunds.com, which conducts research on the auto industry. With the government exiting, investors may feel more comfortable buying GM shares, she said in a phone interview.

Cheap Valuation

Even as its financial health has improved, GM is still vulnerable to an activist because of its valuation as it shakes off government control, Wilson said.

GM’s $42.3 billion enterprise value (GM:US) as of yesterday was equal to 3.1 times analysts’ average estimate for this year’s earnings before interest, taxes, depreciation and amortization, according to data compiled by Bloomberg. That multiple trails all but one automaker larger than $5 billion, a group which fetches a median of 9 times Ebitda, the data show.

Today, GM shares rose 12 cents to $37.67.

The largest U.S. automaker may make an announcement at the beginning of 2014 about its plans for the cash stockpile, said Scott Schermerhorn, chief investment officer of Concord, New Hampshire-based Granite Investment Advisors Inc., which oversees about $560 million including GM shares. If the company doesn’t address it soon enough, an activist investor could step in to accelerate the process, he said.

Detroit Activists

“Now that the government will be out of the way shortly, I think they need to start focusing on how they return money to shareholders,” Schermerhorn said in a phone interview. “Based on conversations with them, they understand this. And if they don’t bring it up, shareholders (GM:US) will.”

Detroit is no stranger to activist investors pushing for change. Billionaire investor Kirk Kerkorian bought stakes in both GM and Ford in the last decade and tried and failed to merge GM with Nissan Motor Co. and Renault SA. Carl Icahn made a short-lived run at GM shares in 2000. Cerberus Capital Management LP took control of Chrysler Group LLC in 2007, and then gave up its ownership when the automaker went into bankruptcy in 2009.

A representative for Kerkorian declined to comment when asked about GM. Icahn didn’t respond to an e-mail requesting comment.

GM’s $52 billion market value is no longer an impediment to an activist, said Steven Balet, managing director at FTI Consulting Inc. in New York, who has been advising on proxy fights for almost 20 years. Icahn is pushing for more cash to be returned to shareholders of Apple Inc. (AAPL:US), which has a market capitalization nine times larger than GM.

Bigger Targets

“In a world where Icahn is pressuring Apple, pretty much any company can be a target nowadays,” he said in an interview.

Companies with a market value of more than $10 billion made up about 13 percent of targets for activist investors so far this year, up from 7.1 percent in 2010, according to the latest data from Activist Insight, which tracks the industry.

While GM’s stock (GM:US) is cheap and trading at “a silly price,” the company seems to already be weighing shareholder returns, leaving little room for an activist to push for improvement, said Matthew Moran, a fund manager at River Road Asset Management LLC in Louisville, Kentucky, which manages $11 billion including GM shares.

“This board (GM:US) understands our shareholders are in here to get a decent return on their money,” GM’s CEO Akerson told analysts on an October conference call.

Dividend Payout

In September, GM said it agreed to repurchase 120 million Series A preferred shares from the United Auto Workers retiree health-care trust for $3.2 billion, or $27 a share. GM can redeem the remaining 156 million Series A preferred stock, which is also held in part by Canadian governments, on or after December 31, 2014, for a total of $3.9 billion, according to a regulatory filing in October.

Moran said he expects GM to start paying a dividend next year and to continue to repurchase stock.

It’s possible that GM, which hasn’t paid a dividend since 2008, may start offering an annual payout of 80 cents a share, according to Joseph Amaturo, an analyst at New York-based Buckingham Research Group Inc. That may cost about $1.2 billion a year, he wrote in a Nov. 21 note to clients.

Based on yesterday’s share price, an 80-cent annual payout would give GM a dividend yield of about 2.1 percent, on par with Ford’s 2.4 percent (F:US), data compiled by Bloomberg show.

Stronger Position

GM has sufficient cash and liquidity to pay an annual dividend of 40 cents a share and buy back stock, including the Canadian government’s $4.1 billion stake next year and the UAW health-care trust’s $5.3 billion block in 2015, Brian Johnson, an auto analyst for Barclays Plc, wrote in a Nov. 21 report.

At the same time, Akerson already has developed a strategy that calls for spending $8 billion annually on capital expenditures. GM also had $33.7 billion in unfunded pension and other retiree costs at the end of September, according to slides posted to the company’s website in October.

“If we have a fortress balance sheet, we will be able to invest as and when we need to through the cycle,” Dan Ammann, GM’s chief financial officer, said during a conference in June. “We will not be in a position where this company was several years ago where, when the business turned down, things got tight.”

GM is in a stronger position than it was prior to the financial crisis and better equipped for another downturn, said Schermerhorn of Granite Investment. The bankruptcy has cut labor costs and other impediments to profitability (GM:US).

“They have to worry about a rainy day, but they no longer have this cost structure that frankly was bankrupting them,” he said. “They’re in a better position to start giving money back to shareholders.”

To contact the reporters on this story: Jeff Green in Southfield, Michigan at jgreen16@bloomberg.net; Tara Lachapelle in New York at tlachapelle@bloomberg.net; Tim Higgins in Detroit at thiggins21@bloomberg.net

To contact the editors responsible for this story: Sarah Rabil at srabil@bloomberg.net; Jamie Butters at jbutters@bloomberg.net


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Companies Mentioned

  • GM
    (General Motors Co)
    • $37.8 USD
    • 0.37
    • 0.98%
  • F
    (Ford Motor Co)
    • $17.82 USD
    • 0.12
    • 0.67%
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