The Morning Brief: Greenlight’s Einhorn Proposes Radical Plan for GM

March 29, 2017   Stephen Taub

The hedge fund manager’s proposal for the company to create two share classes was met with skepticism by a ratings agency.

Frustrated with the lackluster performance of one of its largest holdings, Greenlight Capital’s David Einhorn proposed a radical plan to steer General Motors’ stock back into the fast lane. The activist investor posted on his hedge fund firm’s website a 15-page case for GM creating two classes of stock: one that would pay a dividend and one that would presumably be on a growth track. His argument: the market is not fully valuing the stock, which has a dividend yield of 4.4 percent.

"GM’s investor base has a suboptimal combination of yield-oriented and value-focused shareholders with divergent investment objectives," the presentation states. Under Einhorn’s plan, the company would spin off "dividend shares" and pay the current dividend. The existing stock would be entitled to the earnings in excess of dividends declared on the dividend shares, including all future growth, Greenlight states.

"Creating two classes of common stock will unlock GM’s value by forcing the market to appropriately value the dividend and give credit for GM’s earnings potential," Greenlight asserts in the presentation. It figures the two stocks combined would be worth between $43 and $60 per share and unlock value ranging between $13 billion and $38 billion. Shares of GM surged 2.45 percent on Tuesday, to close at $35.56. At year-end, GM was Greenlight’s third-largest disclosed U.S. long position. The hedge fund firm also had a significant position in GM call options.

In a statement, GM said: "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."

Meanwhile, Moody’s Investors Service said in a new report issued Tuesday that Greenlight’s proposal would be "credit-negative for GM and its subsidiaries" and "represent a significant departure from the company’s current financial strategy," which it calls "well-defined and publicly-communicated" and led to the recent upgrade of GM’s ratings.

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Buffalo Wild Wings, under assault by activist hedge fund Marcato Capital Management, announced it has retained The Cypress Group to help boost the value of the casual dining company. The investment banker that specializes in restaurants and franchises is being hired to market about 10 percent of Buffalo Wild Wings company-owned restaurants.

"This initial sale process represents the first phase of the Company’s ongoing portfolio optimization process," the company adds in a press release.

In response, an incredulous Marcato said in a press release that it had retained Cypress last year to study the feasibility of refranchising at Buffalo Wild Wings. "We strongly believe that a shift to a highly-franchised business model is not only feasible, but also creates substantial value for Buffalo Wild Wings shareholders over the long term," Marcato states. "Even with the Cypress Group’s support of the feasibility of Marcato’s refranchising proposal, we remain concerned that Buffalo Wild Wings will continue to resist this plan."

Shares of Buffalo Wild Wings rose nearly 1 percent on Tuesday, to close at $146.60.

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Shares of Och-Ziff Capital Management sank solidly to a new low price, dropping more than 3 percent on Tuesday to close at $2.22. There were no new developments at the embattled multistrategy hedge fund firm, whose debt was downgraded last week by Standard & Poor’s.



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