Bloomberg News

Hayman Said to Invest in GM as Bass States ‘Detroit Is Back’

December 05, 2013

General Motors Headquarters

The U.S. Treasury expects to sell its remaining 31.1 million General Motors Co. common shares by year-end, depending on market conditions, the government said last month. Photographer: Jeff Kowalsky/Bloomberg

Hayman Capital Management LP has taken a stake in General Motors Co. (GM:US), said a person familiar with the matter, indicating further investor confidence in the auto industry’s recovery as the U.S. winds down its ownership role.

“Detroit is back. And GM could lead the way forward on the equity front,” the Dallas-based fund founded by J. Kyle Bass said in a presentation published on the website HVST.com. “GM equity represents one of the most compelling risk/reward situations of any large cap in the world today.”

The largest U.S. automaker should increase in value by more than 40 percent in 12 to 18 months, Hayman Capital said in the presentation. The stake in Detroit-based GM is one of the hedge fund’s largest investments, said the person, who asked not to be identified because the matter is private. Hayman declined to disclose the size of its stake.

The U.S. Treasury expects to sell its remaining 31.1 million GM common shares by year-end, depending on market conditions, the government said last month. The sale would come after almost half a decade of U.S. government oversight following its 2008 bailout and 2009 bankruptcy. Bass, known for his prescient bet against subprime home mortgages before the financial crisis, said the U.S. exit is a trigger for the stock.

“The U.S. government will be out of the way before the end of the year,” Bass said yesterday in a telephone interview. “They’ve been a source of constant selling pressure in the equity this year.”

Bankruptcy Benefits

GM rose 1.5 percent to $38.71 yesterday at the close in New York, after reaching a record high of $39.62. The stock has gained 34 percent this year (GM:US), outpacing a 26 percent increase by the Standard & Poor’s 500 Index.

After sales plunged to a 29-year low in 2009, when governments financed GM and Chrysler Group LLC restructurings, demand has recovered to the fastest pace since 2007. The rebound serves as inspiration for Detroit, long known as the Motor City, which a federal judge ruled Dec. 3 is eligible for bankruptcy protection from creditors owed $18 billion.

With lower labor costs, less debt and only its strongest brands, the new GM has been profitable for 15 quarters. It reported a 14 percent increase in November light-vehicle sales in the U.S., the second-biggest gain among major automakers, maintaining its market share for the year at an industry-leading 17.9 percent.

Attractive Target

Last week, Bloomberg News reported that GM may become a tempting target for activist investors as the U.S. government exits its stake. With a low valuation and analysts projecting free cash flow will rise next year, Harry J. Wilson, a member of the U.S. auto task force that helped rebuild the automaker in a 2009 bankruptcy, said activist investors may push for more dividend payouts or stock buybacks.

GM already trades at a valuation that’s cheaper than 97 percent of its peers, including Ford Motor Co., according to data compiled by Bloomberg.

Analysts project 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.

One Scenario

Bass said in the note that he is basing his projections for the stock gain on GM issuing a dividend equal to half of the automaker’s 2014 free cash flow, which he estimates as $4.1 billion. That’s more than what some analysts predict the automaker will spend.

Joseph Amaturo, an analyst at New York-based Buckingham Research Group Inc., said in Nov. 21 note to clients that GM may start offering an annual payout of 80 cents a share next year that would cost about $1.2 billion.

Brian Johnson, an auto analyst for Barclays Plc, said on the same day that GM has sufficient cash and liquidity to pay an annual dividend of 40 cents a share and repurchase stock in addition to buying back remaining common shares owned by the Canadian government and a union health-care trust.

The automaker hasn’t paid a dividend since 2008 and executives have said the company wants to maintain a “fortress balance sheet” that can withstand a sharp economic downturn, as well as return cash to shareholders.

Low Multiple

GM’s $44.6 billion enterprise value is equal to 3.3 times analysts’ average estimate for this year’s earnings before interest, taxes, depreciation and amortization, according to data compiled by Bloomberg. That multiple trails (GM:US) all but one automaker larger than $5 billion, a group that fetches a median of about 9 times Ebitda, the data show.

GM should “at least trade in line” with its auto peers, according to the Hayman presentation. Bass said that by his reckoning, GM trades at three times Ebitda, while Dearborn, Michigan-based Ford trades at 4.4 times Ebitda.

“A strong case can be made that GM should trade at a premium to the group,” Hayman said. Bolstering that investment argument are the company’s “unique position and strong underlying fundamentals, a best-in-class leverage to global growth markets, improving operational efficiency from ongoing turnaround efforts and an improving product cadence.”

Dave Roman, a GM spokesman, declined to comment on Hayman investing in the company.

Track Record

Bass, a hedge fund manager from Dallas who focuses on corporate turnarounds, came to prominence after successfully betting against subprime mortgages. While the world’s largest financial institutions wrote off more than $80 billion in subprime losses, Bass and others racked up billions in profit.

He has about $2 billion under management, owning securities ranging from secured debt and shares in J.C. Penney Co. to Argentina’s restructured bonds. He has been betting on a Japanese fiscal collapse for several years and on gold as a hedge against inflation spurred by central banks printing money.

The department-store chain investment hasn’t been a great one as the shares fell 51 percent this year (JCP:US) through yesterday. Hayman cut its stake in half to 5.69 million shares, according to a filing last month, making it J.C. Penney’s 10th-largest investor.

Confidence in GM has been growing as the U.S. Treasury sells down its stake, helping facilitate a return to the S&P 500. The automaker is introducing 18 new or refreshed vehicles this year in the U.S. and 14 next year as it moves to transform its lineup into one of the freshest in the industry from among the oldest.

The automaker’s shares have risen steadily since the Treasury announced in December 2012 that GM was buying back $5.5 billion worth of shares and that it planned to exit the company. GM topped its $33 initial public offering price for the first time in two years in May after reaching a low closing price of $18.80 in July 2012.

In September, GM was raised to investment grade for the first time in eight years when Moody’s Investors Service upgraded the automaker to Baa3 from Ba1, citing the new U.S. models, strength in China and cash. GM has attracted investors such as State Street Corp. and Warren Buffett’s Berkshire Hathaway Inc.

To contact the reporters on this story: Tim Higgins in Detroit at thiggins21@bloomberg.net; Kelly Bit in New York at kbit@bloomberg.net; Stephanie Ruhle in New York at sruhle2@bloomberg.net.

To contact the editors responsible for this story: Jamie Butters at jbutters@bloomberg.net; Christian Baumgaertel at cbaumgaertel@bloomberg.net


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Companies Mentioned

  • GM
    (General Motors Co)
    • $37.87 USD
    • -0.10
    • -0.26%
  • JCP
    (JC Penney Co Inc)
    • $8.84 USD
    • -0.10
    • -1.19%
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