GM Sitting on $27 Billion In Cash; Tempting Target For Activist Investors?

November 26, 2013

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DETROIT (Bloomberg) — General Motors Co. 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 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, N.Y. “GM has a huge cash hoard 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. 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 CEO 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 GM has fallen to about 2.2 percent and was valued at about $1.2 billion on Monday. 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.”

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.

Cheap valuation

GM’s $42.3 billion enterprise value is 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.

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, N.H.-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.

“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 will.”