Frustrated With Tesla and GM, David Einhorn Amps Up Pressure

Hedge fund manager David Einhorn has two of the most frustrating trades in the market: a long position in General Motors Co. and a short against Tesla Inc. 

Both of Einhorn’s plays are in dire need of a catalyst. Despite record earnings, GM’s stock is no higher than its 2010 initial public offering price. And Tesla, which already burned through about half the cash it raised in the first quarter, is up more than 40 percent this year.

So he’s ratcheting up rhetoric on the two automakers. With Tesla, Einhorn has limited his aggression to a shot at its ever bullish shareholders, whom he calls “hypnotized” by Chief Executive Elon Musk. With GM, he’s grown far more aggressive, penning a new letter accusing management of being uninterested in making moves to lift the share price and launching a dedicated website that plugs his proxy battle with the Detroit automaker.

“We think GM stock is undervalued dramatically even in light of the risks of a cycle,” Einhorn said in an interview Thursday. “We don’t see why GM should sit by complacently with an inefficient capital structure while shareholders suffer.”

Proposal Push

A slump in auto sales may be holding auto stocks like GM down, but Einhorn says he thinks management could be doing so much more with its $20.4 billion cash hoard to help investors. So he is aggressively pushing his proposal for a dual class of common stock at GM, a company he praised as recently as March for having “strong operations.”

But while he originally made no accusations against management, he’s now singing a different tune. Einhorn said he presented the proposal to GM in the fall, and the company reviewed it for several months, only to find ways to shoot it down. That’s when he went public.

“The reason it took seven months was that we gave them every opportunity to take it seriously and they failed to do so,” Einhorn said in the interview. “We think they hired advisers to paper over a conclusion that they made before they understood it themselves.”

Einhorn, whose Greenlight Capital owns 3.6 percent of GM, was equally tough in the letter he sent to shareholders May 3, in which he once again laid out his proposal to convert GM’s shares into two issues, a dividend stock and a capital-appreciation stock. The value of those shares would be between $42 and $60 per existing share, Einhorn calculates. GM was trading up 0.7 percent to $34 as of 12:13 p.m. Monday in New York.

The automaker’s board has recommended against the move, and the two sides have been exchanging barbs in the days since.

Different Vantages

Einhorn contends GM’s board isn’t interested in boosting the share price and doesn’t think anything can be done until management proves — over several years — that it can make money in a down cycle. “Even long-term shareholders shouldn’t have to be this patient,” he wrote in the shareholder letter.

In a written response, GM called Einhorn’s proposal, “a high-risk experiment in financial engineering that is not in the best interests of GM shareholders, would result in a downgrade of GM’s credit rating, and would not increase value for shareholders.”

Few analysts covering GM have recommended his proposal. Investors who want nothing more than steady cash from dividends can buy bonds or utility stocks, said Erik Gordon, professor at University of Michigan’s Ross School of Business.

“Investors who want only the growth side of GM probably are few these days,” Gordon said. “It is far from a sure thing that splitting the stock will lead to higher overall value for stockholders.”

Key Differences

The two sides have a couple of key differences. GM has argued that there is no precedent to show how two share issues would generate more value than the current common stock. In fact, GM said management took Einhorn’s proposal to credit rating agencies, where they were told such a split could jeopardize the automaker’s investment-grade ratings, making borrowing more expensive and likely putting a downward pressure on shares.

Einhorn said his proposal does not include a legal obligation to repay dividends, while GM has said that the dividend stock would act as debt because it would have to make the payments later on if the dividend were suspended. The three major rating companies all issued reports saying the dual-class shares could be seen as debt and weigh down GM’s credit rating.

But Einhorn said in a May 4 statement that GM misrepresented his proposal to the agencies by eliminating his point that the dividend shares would not be preferred shares and suggesting they would rank senior to the capital-appreciation shares. He urged shareholders to see “GM’s duplicity for themselves by reviewing the term sheet Greenlight provided to GM and the term sheet GM purportedly provided to the rating agencies.”

Tesla Bubble

In other words, Einhorn is frustrated, GM is annoyed and there will be plenty of sniping from both sides until June 6 when the vote takes place. But it’s not the only automaker stock where’s Einhorn needs a change in fortunes.

Einhorn said he also has a small short position in Tesla, which he said in an April 25 shareholder note was one of his biggest losers. Tesla was down 0.4 percent to $307.05 as of 12:16 p.m. in New York Monday, but it’s still up nearly 44 percent this year.

With GM’s shares stagnating this year and Tesla on a surge, the electric car company’s market capitalization passed GM’s in April, with the two jostling for the lead since. As Tesla has soared ahead of the long-awaited Model 3 launch, Einhorn’s called its shares a bubble waiting to burst.

“The enthusiasm for Tesla and other bubble-basket stocks is reminiscent of the March 2000 dot-com bubble,” Einhorn said on Greenlight’s May 3 earnings call. “As was the case then, the bulls rejected conventional valuation methods for a handful of stocks that seemingly could only go up. While we don’t know exactly when the bubble will pop, it eventually will.”

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