DETROIT – General Motors announced a $5 billion stock buyback as part of a plan to return more cash to investors. In return, an activist shareholder decided to drop a potentially divisive bid for a seat on the company’s board.
The moves, announced Monday, are part of a deal with Harry Wilson, a former member of the government task force that restructured GM coming out of its 2009 bankruptcy.
Wilson, who represents four hedge funds which own about 2 per cent of the company, had previously accused GM of hoarding cash to the detriment of shareholders and had sought an $8 billion buyback and a board seat.
But on Monday he said he was impressed at how quickly GM’s management responded, adding that the company agreed to just about everything the funds wanted.
“We basically said thank you,” Wilson said.
GM had $25.2 billion in cash at the end of last year, part of what it called a “fortress balance sheet” designed to withstand another financial crisis. Going forward the automaker plans to maintain a cash balance of $20 billion and aims to keep its investment-grade credit rating.
The share repurchase will begin immediately and finish before the end of 2016. Investors liked the announcement. GM shares rose 97 cents, or 2.7 per cent, to $37.51 in midday trading Monday.
Talks with Wilson’s group had been going on for about two weeks, GM CEO Mary Barra said Monday. She said other major shareholders agreed with the buyback.
She indicated that the buyback might have come without Wilson’s prodding. “We were on a path to do this anyway,” Barra said Monday.
GM recently announced plans to boost its quarterly dividend by 20 per cent to 36 cents. Combined, the dividend increase and the buyback will cost GM $10 billion by the end of 2016.
Chief Financial Officer Chuck Stevens said a $20 billion cash reserve is enough for GM to withstand any potential economic downturn, as well as the costs of an ignition switch recall.
The Justice Department is investigating the company for failing to disclose a deadly problem with ignition switches in its small cars to government safety regulators. That penalty could be as much or more than the $1.2 billion that Toyota paid in a similar case. The switches are responsible for at least 64 deaths, and GM has committed to making payments to those injured and families of those killed. The company has set aside $400 million for the payments but says they could go as high as $600 million.
Also, like other Detroit automakers, GM also faces the financial uncertainty of contract talks with the United Auto Workers union later this year.
The deal with Wilson makes the stock more attractive to buyers, yet still allows GM to keep sufficient cash to reinvest in the business, and handle any economic downturn and pay any penalty from the Justice Department, said Morningstar Analyst David Whiston.
An $8 billion buyback would have been too much, he said. “It’s a very cyclical industry. A lot of things can go wrong that are beyond management’s control,” Whiston said.
He doesn’t think Wilson got the better of GM and said GM hinted that a buyback was in the works when it announced earnings in February.
GM also pledged Monday to return capital to shareholders each year and said it will announce those allocations each January. It reiterated plans to invest more than $9 billion in the company this year to roll out more new vehicles in the coming years. GM promised a 20 per cent rate of return on its capital investment, a number it will report to shareholders each quarter.
Stevens said he did not expect credit rating agencies to change their outlook on GM.
Wilson, 43, filed notice of his board candidacy on Feb. 9 in a letter to Barra. The funds he represents include Taconic Parties, Appaloosa Parties, HG Vora Parties and Hayman Parties.
Under a deal with the funds, Wilson would get up to 4 per cent of any profits they make on GM stock.
Wilson had criticized GM for being an underperforming company with substantial cash that needs help reaching its potential. But Monday, he said Barra and GM management are serious about being good stewards of capital. The hedge funds will stay on as long-term GM investors, he said.
“It’s rare in these situations that companies listen as well and are as responsive. They did it in a very complete package,” Wilson said.