"As significant, long-term shareholders, we believe in GM's strong earnings potential. Our plan would unlock significant value and lower GM's cost of capital. It would provide the Company complete strategic flexibility without adding any default, refinancing, or balance sheet risk. We encourage our fellow GM shareholders to carefully review the presentation and to urge GM's management and Board to adopt this compelling Plan," Einhorn wrote.
The fund manager proposed that the firm remake its capital structure to include,
The Dividend Shares: GM would continue to pay quarterly dividends at the current annual rate of $1.52 per share, but the dividends would now be paid on the "Dividend Shares" instead of the existing common stock. The Dividend Shares would be distributed to GM's existing shareholders at no cost. The Dividend Shares would appeal to yield-focused investors.
The Capital Appreciation Shares: GM would grant its existing common stock the majority of the voting rights and participation in the rest of the Company's earnings, cash flows, share buybacks and future growth. The Capital Appreciation Shares would appeal to and be valued appropriately by investors focused on GM's growth prospects.
Einhorn said that he believes his plan would lower GM's capital costs and free up to $38 billion of shareholder value. He argues that the current capital structure attracts shareholders who are satisfied with modest performance as long as the dividend yield stays healthy.
"The company's diverse shareholder base currently consists of a mix of value-focused and income-oriented investors united by their confidence in GM's prospects, but with different investment objectives. The disparity in investment objectives has led to a sub-optimal shareholder base," Einhorn argued.
Einhorn said that at its current market price the shares produce a 6.6% PE, the lowest in the S&P 500. At its current trading value, GM's shares trade at a 4.4% dividend yield despite a 24% dividend payout ratio. The shares are barely above the 2010 IPO price despite strong operating results and an equity bull market. "GM has failed to create much long-term shareholder value. GM can fix this," Einhorn said.