The veil over the affairs of Hughes Aircraft, which has been zealously maintained for over three decades of private ownership, was pulled back by General Motors on Wednesday when it issued a prospectus for acquiring the El Segundo-based aerospace firm.
The company that emerges from the prospectus into public view is one that has built a record of notable growth and profit in recent years, but also one whose performance has quickly eroded in the first nine months of this year, with a 46% decline in earnings.
The firm has taken $88 million in charges against its earnings for problems with quality control and warranties at its various units in the past two years and $24 million in charges against a troubled program in its satellite manufacturing operation.
The long-awaited prospectus was published as the New York Stock Exchange prepared to open trading as early as today in the new class of GM stock that is linked in part to Hughes Aircraft profits. The stock, called GM Class H, was created by the auto maker to pay for a large part of the $5.1-billion acquisition of Hughes.
The approval would enable quotation of share prices even though stock certificates will not be issued until the deal is closed.
The final closing of the deal between GM and the Howard Hughes Medical Institute, the sole owner of Hughes Aircraft, could occur as early as Dec. 13, GM Executive Vice President Donald Atwood said Wednesday.
GM is mailing out the prospectus this week to its shareholders and can close the deal as soon as it receives a simple majority of outstanding shares approving the deal, Atwood said.
Hughes Aircraft will be a part of General Motors Hughes Electronics Corp. (GMHE). GM will transfer into GMHE its Delco Electronics unit, which earned $264.8 million on sales of $2.7 billion in 1984. The Class H stock is based on profits of GMHE.
The stock market may begin testing the waters of the Class H stock as early as today, analysts said. However, some significant indications of the stock's value are contained in the prospectus.
The Class H stock would have earned $1.77 per share in the first nine months of this year if GM owned Hughes, according to the prospectus. That amounts to $2.36 per share on an annual basis.
Analysts said they expect the stock to trade at a price of 12 to 14 times earnings, which means it could sell at $28 to $33 per share. Such a level is far below the $60 per share that GM has guaranteed for the 50 million shares that it will issue to the Howard Hughes Medical Institute.
The guarantees do not become effective for three years after the deal closes. By then, earnings are expected to have grown sharply, analysts said. If they don't, GM faces $2 billion in potential liability on the guarantees.
Profits Would Have Dropped
The prospectus also indicates that GM's profits would have dropped in both 1984 and the first three quarters of 1985 if it had owned Hughes during those periods. GM's earnings would have been reduced to $4.478 billion, down 0.8% from its actual 1984 earnings.
The drop is attributable to two factors. First, GM would have lost $286 million in 1984 on forgone interest on the $2.7 billion in cash that it is paying for Hughes. It also would have had to charge against profits $146.7 million for "goodwill." Annual goodwill charges will occur for the next 40 years because GM is paying about $4.1 billion over book value in acquiring Hughes.
Auto industry analysts, who have generally agreed that GM paid an extremely high premium to win the bidding war for Hughes, were not surprised that the acquisition could depress GM's earnings.
'A Rich Price'
"When you look at the lack of earnings at Hughes, it really does look like a rich price," said Joseph Phillippi, automotive analyst with Dean Witter.
Phillippi noted that net earnings at Hughes equaled less than 5% of sales in 1984 and less than 3% so far this year--far below defense industry standards.
The lengthy prospectus, which GM calls a "solicitation statement," also discloses that:
- Hughes' profits dropped 46% to $117.8 million on sales of $4.6 billion in the first nine months of 1985. The firm earned $266.1 million on sales of $5.8 billion in 1984, the peak of a rapid five-year expansion of sales and profits.
In 1980, Hughes earned $77.3 million on sales of $2.5 billion. At the peak of its profitability, Hughes posted a return on equity of 35.3% in 1982.
- For accounting purposes, GM has valued the acquisition of Hughes at $5.1 billion.
- Hughes Chairman Allen Puckett was not listed among the board of directors of GMHE in the prospectus. GM Executive Vice President Atwood attributed the oversight to "the press of time" in preparing the document.
He said that he expects Puckett, Hughes President Donald White, Hughes Vice Chairman Richard Alden and Hughes Executive Vice President Malcolm Currie to be appointed to the board in the near future.
- One of GM's 24 directors dissented from approving the acquisition of Hughes. GM officials declined to identify him or why he withheld his vote.
- Hughes has taken three major loss provisions so far in 1985, including two provisions totaling $60 million in its troubled missile business. The firm also took a $24-million provision for problems in its Intelsat VI satellite program, which so far was not known to be troubled.
- Separately, GM also proposed to redefine the way that it reports earnings for the new Class E stock of its Electronic Data Systems subsidiary.
Previously, GM has reported two earnings figures for its Class E stock--one showing total earnings per share and another, much smaller figure reporting earnings available for E dividends.
Under the proposed new formula, which GM also plans to apply to its Class H stock for Hughes, only those per-share earnings available for dividends would be reported separately for Class E stock.
The change, which must be approved by shareholders, will not affect the dividends received by Class E stockholders. But the extra EDS earnings that will not be reported as available for dividend payments will now be included as part of the per-share earnings of the common stock of the parent corporation.
OPENING THE BOOKS ON HUGHES AIRCRAFT
For more than 30 years, ever since it was founded by the eccentric and secretive millionaire Howard Hughes, Hughes Aircraft has kept its financial figures close to its vest. Now, for the first time, the public has a chance to see the company through a prospectus for a new class of stock being issued by General Motors, which is acquiring the giant aerospace-defense contractor.