GM May Restructure Price Deal on H Stock
General Motors disclosed Friday that it is holding negotiations with the Howard Hughes Medical Institute to modify a key provision of the 1985 deal in which the auto maker bought Hughes Aircraft from the institute.
Although GM did not say what specific issues are being discussed, an announcement suggested that a major restructuring of the agreement may be at hand. It said the talks started in November.
GM said it is “exploring alternatives with a view to meeting the institute’s needs for additional income and liquidity.” The medical institute owns 99.5 million shares of special GM stock, known as Class H, which it received along with $2.7 billion in cash for Hughes Aircraft.
The special H stock has created some unique problems for both GM and the medical institute, owing to a complex price guarantee GM made when it issued the stock.
Under provisions of the guarantee, if the stock is trading at less than $30 per share during the last three months of 1989, GM is liable to bring the institute’s shares up to the $30 level. GM faces a maximum liability of $2 billion on the guarantee.
Aerospace analyst Joseph Campbell of Paine Webber said Friday that the announcement is significant and that it appears that the negotiations will involve amendments to the price guarantee.
The guarantee has caused knotty problems because H shares are thinly traded and their price is believed to be largely controlled by GM trading activity. H shares are trading above their fundamental value, posing the risk that after the guarantee expires, the price will collapse.
The announcement Friday, which was made jointly by GM and the institute, said: “Negotiations with regard to H stock guarantees have been ongoing since November.”
Campbell said that if GM and the institute agree to modify the price guarantee, a major issue will be the effect on other shareholders. The institute holds 76% of the H shares, and the rest are held by the public and GM employees. GM’s announcement paid special attention to those shareholders, saying any changes would be made “in a manner which is consistent with the interests of the institute as well as all stockholders of General Motors.”
Relations between GM and the medical institute have grown icy since the big $5.2-billion deal in 1985. GM has been seeking a rebate on the price it paid for Hughes Aircraft, owing to some unexpected losses on a big Navy contract.
Earlier this month, Irving Shapiro, a leading trustee at the institute and chairman of its finance committee, said it was “unseemly” of GM to be seeking a rebate. Moreover, Shapiro suggested that GM trading had made H stock overpriced and that the institute was prepared to sell its shares to drive down the price and thereby trigger the guarantee next year.
Such an unusual maneuver by GM’s largest shareholder suggests that the price guarantee was flawed. Morgan Stanley & Co. was the investment banker advising the institute, but it is unknown whether it has any continuing role in the issue.
The GM announcement was apparently prompted by a Times story Friday that disclosed the institute might be preparing to sell some of its shares in an effort to drive down the price of the overvalued H stock.