Hughes May Buy, Sell Defense Assets, Sources Say

Hughes Electronics Corp. is looking at possibly buying a rival aerospace and defense company even as it is entertaining multibillion-dollar takeover bids for its own sprawling defense operations, people familiar with the company’s actions said Thursday.

The seemingly paradoxical moves reflect the complex array of strategic and financial options facing Hughes and its parent company, General Motors Corp., as they try to figure out how Los Angeles-based Hughes should be structured for the 21st century.

Hughes is seeking bids for its defense lines as part of one scenario whereby the company would concentrate on its thriving space and telecommunications divisions, including its burgeoning DirecTV satellite-to-home television business, sources said.

That proposal also envisions a breakup of Hughes that, among other things, would enable GM to reap the benefits of Hughes’ surge in value since it was bought by the giant auto maker a decade ago, they said.

But under another scenario being considered, Hughes would take advantage of the rapid consolidation of the defense industry and acquire an additional company that would keep Hughes’ defense group among the industry’s leaders, they said.

“They’re looking for opportunities to buy” a defense contractor, said one person familiar with Hughes’ moves.

Even if Hughes does buy a defense company in the near future, that wouldn’t rule out the prospect that the company might ultimately divest its entire aerospace and defense group as part of a breakup of the company, the sources said.

Hughes executives declined comment.

But whatever steps the company takes, it could spark the last big phase of the defense industry’s consolidation, in which military contractors have been merging in order to survive the massive post-Cold War cuts in Pentagon weapons spending.

Also at stake are thousands of jobs in Southern California, where Hughes remains a linchpin of the region’s aerospace industry despite having slashed its work force in the early 1990s. Hughes’ aerospace and defense group employs about 15,000 people at several Southland sites, including El Segundo, Fullerton, Irvine and Newport Beach.

The group--which overall has about 37,500 workers in 20 states--accounted for $6 billion, or 40%, of Hughes’ $14.8 billion in total sales last year. Hughes also manages GM’s Delco automotive-electronics unit. Hughes, with a worldwide work force of 84,000, also is a leading builder and operator of commercial satellites.

With Pentagon contracts dwindling, Hughes’ defense group has posted flat results for the last few years, and that’s fueled speculation that Hughes Chairman C. Michael Armstrong might shed the group in favor of Hughes’ fast-growing satellite and communications interests.

Hughes could command a handsome price for its defense group today, because the shrinking defense industry has reduced the number of prized contractors available, analysts said.

Indeed, Boeing Co. today is expected to complete its $3-billion purchase of Rockwell’s space and defense group. Texas Instruments Inc. is also holding an auction for its defense operations.

Hughes’ defense group might fetch roughly $8 billion, and the bidders are likely to include McDonnell Douglas Corp., Northrop Grumman Corp. and Raytheon Co., the Wall Street Journal reported Thursday.

The report sparked a rally in GM’s Class H shares, which are tied to Hughes’ performance. The stock rose $3.25 a share, to $56.375, in New York Stock Exchange composite trading.

Analysts have speculated for months that Raytheon and Hughes might join forces, in part because the companies already share the manufacture of several naval missiles. Neither company has confirmed any talks.

Besides missiles, Hughes’ aerospace and defense group makes radar and air-defense systems, electronic warfare equipment, imaging and optical gear, and computer and database systems for the Pentagon. Its radar is carried aboard the B-2 bomber and many U.S. fighter jets.

But any Hughes transaction is fraught with complexity, because of its ownership by GM.

The auto maker bought Hughes in 1985 for $5 billion, and it later issued the Class H stock that gave investors claims on Hughes-generated dividends but no equity stake in the company. GM still owns 100% of Hughes.

Since then, Hughes’ market value has soared above $20 billion. But that gain is not being reflected in GM’s own stock price, and GM has signaled it wants to unlock that extra cash by shedding all or parts of Hughes, observers said.

“They know the stock price doesn’t reflect the enormous value that’s been built up there” by Hughes, said one source familiar with GM’s strategy.

But Hughes’ higher value also means its sale would probably create a huge tax liability for GM, and now GM is searching for a way to structure any deal with a minimal tax bite, the sources said.