GM Shares Dive on News of Hughes Stock Swap
General Motors Corp.’s stock fell 11% on Monday, its biggest decline since the October 1987 market crash, after the largest auto maker said it would accept only 25% of shares investors sought to swap for those of its Hughes Electronics Corp. unit.
The exchange left arbitragers with too many GM common shares and too few of its Class H, which tracks the performance of Hughes. Some investors had loaded up on GM shares, which have traded at an average 24% discount to Hughes since the offer was announced Feb. 1, with a notion to swap the auto maker’s shares for those of the electronics company.
“Basically it’s arbs who bought the shares in anticipation of the exchange unloading the shares they now know won’t be accepted,” said PaineWebber Group analyst Joe Phillippi. “It’s classic arbitrage.”
General Motors shares dropped $8.94 to close at $78, while shares in El Segundo-based Hughes rose $6.88 to close at $96.75, both on the New York Stock Exchange. GM’s only bigger decline in two decades was a 21% drop on Oct. 19, 1987.
Investors have long clamored for more shares of Hughes, whose DirecTV satellite-television service has more than 8.3 million subscribers and is the largest direct broadcasting service in the U.S. GM had offered to swap common shares for as much as $9 billion in Hughes stock and cut its stake to 35% while maintaining control.
Investors ended up seeking about $32 billion in Hughes shares based on the stock price when the offer closed Friday. General Motors shares rose 32% in the 12 months ended Friday, mostly on expectations about Hughes, while Hughes rose more than 50% in the same period. At least four analysts have downgraded GM stock in the last month on the premise that its price was inflated by investor anticipation of the exchange.
As of April, the average daily short interest in Hughes shares was 9.5 million shares, more than double January’s total. Short sellers sell borrowed securities with the hope of buying them later at a lower price and returning them to the lender.
Holders of General Motors common stock tendered 335.8 million shares in the exchange offer that ended Friday--more than half the 621.2 million shares General Motors had outstanding at the end of the first quarter. The company said it expects to accept only 86.4 million common shares in exchange for 92 million shares of the Class H.
“Management did a great job on the road, visiting tons of accounts and got people excited about it, and that’s reflected in the shares tendered,” said CIBC World Markets analyst Jeffrey Wlodarczak, who has a “strong buy” rating and a $149 target price on the Hughes. Within 18 months, DirecTV likely will be the second-largest U.S. provider of multi-channel programming after AT&T; Corp. “Now that the transaction is over, [GM] goes back to trading like an auto company should,” Wlodarczak said.
The exchange will reduce General Motors shares outstanding by about 14%, which should boost earnings, eventually enhancing GM’s stock value, some analysts said.
GM acquired Hughes in 1985 for $5.2 billion. Analysts and investors in recent years have pushed GM to shed the subsidiary because they regarded it as a high-growth technology business whose value was held back under the wing of a cyclical industrial company. The auto maker offered the exchange as a way to help unlock Hughes’ value without losing control of the unit, which executives say gives GM a competitive advantage as electronics become more important in cars and trucks.
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Sudden Skid
GM shares, which ran up on enthusiasm for the Hughes Electronics tracking stock, have given back most of the gains. Weekly closes and latest on the NYSE:
Monday: $78, down $8.94
Source: Bloomberg News
