The American giant 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.”
As 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; this could make 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, New York. “GM has a huge cash hoard and they are generating lots more cash each year, so they need to be thoughtful about that.”
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 Chief Executive Officer Dan Akerson’s goals to maintain spending on new products and buy back preferred shares left after the bankruptcy.
“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 a statement, when asked about the potential for an activist investor to come in and about priorities for the company’s cash.
Even as its financial health has improved, GM is still vulnerable to an activist because of its valuation as it shakes off government control. GM’s $42.3 billion enterprise value as of yesterday was 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.