The Activist Investor Blog
The Activist Investor Blog
At GM, The Year’s Most Interesting Activist Project
GM and its investors have been through a lot, of course, in the past few years. Now, for the first time since its reorganization, the company confronts a serious activist situation. And, what a situation it is.
Since its reorganization, GM has become a cash machine, and one of our top ten cash hoarders. As of 12/31/14, it has about $28 billion in cash and $9 billion in debt. As one investor put it recently, "Sitting around with $25 billion in your pocket getting zero percent on it just doesn't make any sense to me."
Now, investors want some of that cash back. Four major hedge funds, with about 2% of the shares, have hired a top banker-turned-activist to do just that. Whether Harry Wilson succeeds, and GM repurchases more shares, remains to be seen. GM’s initial response promises to make it lively.
MAEVA
Harry Wilson started MAEVA Group in 2011 as a “turnaround merchant bank”. Before that, he worked in investment banking with Goldman Sachs, and private equity with CD&R, Blackstone, and Silver Point. Notably, he advised the Treasury Department on the GM restructuring in 2009.
He tasted activist investing when Dan Loeb nominated him as a director at Yahoo and Sotheby’s. As far as we can tell, GM represents the first time he will lead an activist project.
GM
Last year, Wilson suggested GM using its cash hoard to repurchase shares. When CEO Mary Barra politely but firmly rejected the idea, he decided to nominate himself to the BoD.
Last week, Wilson notified GM of his intent to seek election to the BoD. He also submitted a non-binding resolution asking shareholders to vote on whether GM should repurchase the $8 billion in shares. It’s another example of using a non-binding vote to assess shareholder sentiment for a strategic idea.
GM typically holds its annual meeting in May, so the action should pick up quickly.
The Shareholder Group
Wilson recruited four GM shareholders to his cause:
❖Appaloosa (David Tepper)
❖Hayman (Kyle Bass)
❖HG Vora (Parag Vora)
❖Taconic (Frank Brosens)
He entered into a creative deal with each, with terms varying a bit among them. In general, they will pay MAEVA a performance fee of 4% of their gains if he wins a BoD seat, and 2% if he doesn’t. MAEVA will also collect a 25 basis point annual management fee, based on the initial value of the funds’ investment.
The terms do vary:
❖Appaloosa pays only 2%, and only on $300 million of its $500 million investment
❖HG Vora pays 4% without the 2% adjustment
❖Hayman pays the management fee only on $36 million of its $300 million investment
❖Taconic and Hayman net the management fee from the performance fee, while the other two investors do not.
If the four investors don’t add to or reduce their current positions (they have agreed to not reduce), and supposing GM shares increase 20% in two year’s time, then we estimate that MAEVA stands to make about $8 million. At a minimum, the management fee amounts to about $2 million per year. The investors also reimburse up to $1 million in MAEVA expenses.
GM Plans to Fight
The company does not appear to wish to settle this quietly.
Wilson submitted his nomination and resolution at the company deadline for including these matters at the 2015 annual meeting. Seeing as his group falls well below the Form 13D filing threshold, he need not and did not disclose anything.
GM need not disclose the nomination and resolution, either. The resolution would eventually appear on the company proxy materials. MAEVA would also start to solicit proxies, and spend that $1 million or more persuading thousands of GM shareholders to elect him to the BoD. Perhaps MAEVA would first disclose the nomination in a preliminary proxy filing, say sometime in March.
Of course, GM did disclose the nomination and resolution in a Form 8-K filing, thus controlling the initial media coverage. GM also revealed the terms between MAEVA and the four hedge funds. MAEVA’s agreements with each fund specifically mandate confidentiality of the terms, so GM spoiled that. Now GM shareholders can also debate the propriety of investors paying director candidates.
GM also defended its current balance sheet strategy. Its news release affirmed plans to boost the quarterly dividend. Other friendly media worry that share repurchases will hurt its credit rating, a reminder of its troubled past.
Finally, GM retained the tough and experienced activist defense teams at Goldman Sachs and Morgan Stanley. We expect Wachtell Lipton to follow soon enough.
An Unexpected Turn?
We don’t have a view whether GM in particular should add Wilson to the BoD and repurchase more shares. Wilson has not yet published an analysis of the proposed share repurchase, so we can’t estimate the impact on the balance sheet and share price. We always love directors that represent shareholder interests, as Wilson has done well in the past. And, it sure seems like GM has more cash than it can possibly use.
We do think this situation won’t end easily. Investors have not one but two tasks: elect Wilson to the BoD, and persuade the company to repurchase shares. Wilson will spend far more than $1 million soliciting proxies beyond the 2% in his group. GM can marshal tremendous resources in rounding up support for its balance sheet strategy and current directors. Even if he does win a BoD seat, his single voice won’t have a deciding impact. Or, the company could offer a much more modest share repurchase.
We suspect Wilson and the funds thought this might work out quietly. He avoided any sort of publicity, and evidently did not float any rumors that could help pressure the company. He only wants a single BoD seat. With his credentials, and David Tepper and Kyle Bass behind him, they had every reason to think GM would go along. Alas, it wasn’t nearly enough.
We wish them well; hope for the best, expect the worst.
Tuesday, February 17, 2015