Hughes Aircraft Put Up for Sale : Analysts Say Firm Could Bring $3 Billion to $5 Billion

Hughes Aircraft Co., the giant aerospace firm that has been privately owned since its formation by Howard R. Hughes, was officially put on the auction block Thursday in what could lead to the largest sale of a non-oil corporation in U.S. history.

Howard Hughes Medical Institute, a Miami-based nonprofit research foundation that has owned the company since the late billionaire transferred ownership in 1953, announced Thursday that it has instructed the New York investment banking firm of Morgan Stanley & Co. to “move forward with preparations contemplating either a public offering or a sale” of the El Segundo-based company to a single entity.

The statement, coming months after the institute’s new trustees first revealed that they were studying a possible sale, was seen by some observers as a signal that a deal might be imminent.

Morgan Stanley was appointed last fall to study alternative sale possibilities and to place a value on the firm but was not given the go-ahead to actively seek a buyer until Thursday.

Wall Street analysts say Hughes Aircraft, the nation’s largest producer of radars and other defense electronics equipment, could fetch between $3 billion and $5 billion on the open market.

Such a deal could have a major impact on the Southland’s important aerospace industry because Hughes Aircraft is California’s largest industrial employer. Most of its more than 68,500 employees work in Southern California.

“Our first order of business is to deal with those companies that have indicated an interest in buying the company, to see what they have in mind,” said Irving S. Shapiro, former chairman of DuPont Co. who, as a trustee of the institute and chairman of its finance committee, will be closely involved in any negotiations.

He would not name any potential buyers but did say that there “were more than two or three” and that he hoped a deal could be completed this year.

However, if the trustees deemed that a public stock offering would fetch more than a sale to a single buyer, a strong effort would be made to sell a large block of the stock to employees, Shapiro said.

Company Chairman Allen E. Puckett said last March that the trustees were studying a plan under which an Employee Stock Ownership Plan would buy as much as 50% of the firm’s stock.

“If it is possible for employees to share in the ownership, then we would like to help that along,” Hughes Aircraft President Donald White said Thursday, adding that planning for an employee sale already has been completed.

The medical institute might retain some ownership stake if a public offering is pursued, Shapiro said.

However, he said, the trustees ruled out the possibility of breaking the company into smaller units and selling them separately.

“The company’s worth a lot more in one piece than it is (in) a number of autonomous pieces,” White said.

A full or partial sale of Hughes Aircraft was deemed almost inevitable early last year when a Delaware court ordered that a new set of trustees be appointed to govern the medical institute. Howard Hughes had been the sole trustee, but, after his death in 1976, control of the institute was improperly assumed by two Hughes aides, the court ruled.

The new nine-member board of trustees, appointed by the court last April, soon indicated that it might sell all or part of Hughes Aircraft to diversify the institute’s holdings and increase its income.

Hughes Aircraft, the sole source of income for the institute, is one of the nation’s most profitable defense firms, but it has been plowing the bulk of its earnings back into research and development.

The company generated about $80 million in income for the institute last year, making it the nation’s largest medical research foundation, said Donald S. Fredrickson, president and chief executive of the institute. However, Hughes Aircraft probably earns between $250 million and $300 million a year, analysts estimate.

The sale of the company and investment of the proceeds in a diversified portfolio could boost the institute’s annual income to between $200 million and $300 million, they estimate.

The sale also is motivated by questions raised by the Internal Revenue Service about the institute’s tax-exempt status. The IRS is currently auditing the institute’s records between 1975 and 1980, Fredrickson said.

Some Wall Street analysts speculated that the institute would rather sell to one entity, since that approach is easier and may fetch a higher price. However, not many companies are large enough to be able to afford such an acquisition and capable of managing it.

Companies mentioned as possible buyers include General Electric Co., General Motors Corp., Litton Industries Inc., Rockwell International Corp. and Boeing Co.

If the institute decides instead on a public offering, the sale would likely be done in stages to maximize the price and market receptivity, Wall Street sources said. Some analysts expressed concern that recent publicity about quality problems with Hughes Aircraft’s weapons systems might hurt its price in a sale.

Company President White acknowledged that the publicity has had an impact but said it was “not severe.”

The Hughes Aircraft sale is expected to surpass Nestle S.A.’s soon-to-be-completed $3-billion acquisition of Los Angeles-based Carnation Co. as the largest completed or proposed acquisition of a non-oil U.S. company.