GM Expected to Vote on Bids for Hughes
No matter which company wins the yearlong takeover battle for Hughes Electronics Corp., the delay in making a deal will have cost shareholders billions of dollars.
Analysts, investors and people involved in the deal say infighting, bureaucracy and indecision at Hughes parent General Motors Corp. are to blame.
As the talks dragged on, the stock market value of Hughes, whose prized asset is satellite television provider DirecTV, has slipped to about $13.5 billion.
That is less than half the $33billion Hughes was worth when the nation’s largest auto maker hired investment bankers in September 2000 to pursue the sale.
The GM board is expected to vote today on competing bids from News Corp. and EchoStar Communications Corp., ending a chapter on one of the most intriguing corporate soap operas in years. The winner stands to get Hughes for what Fitch’s GM analyst Mark Olive calls a “fire sale price.”
Hughes stock is closer to a four-year low than to its peak in May 2000 of $47. GM’s 30% controlling stake in the El Segundo-based firm has a market value of $4 billion, down from $10billion a year ago. Hughes trades publicly as a GM tracking stock.
On the New York Stock Exchange, GM shares rose 77 cents to close at $45.40, and Hughes shares dipped 5 cents to close at $15.35.
Hughes shareholders have grown frustrated as the value of the subsidiary dropped amid management upheaval, a market meltdown and troubles at DirecTV. Hughes management acknowledged this summer that the long negotiations had distracted them from running the business and caused DirecTV to miss its growth targets even as EchoStar flourished.
“They’ve been in deal mode for 18 months; it’s gone on too long and a decision needs to be made,” said Stanley E. Hubbard Jr., whose family owns more than 40 million Hughes shares as a result of a 1999 sale to Hughes of its United States Satellite Broadcast Corp.
For its part, the auto maker says the nature of the deal prolonged the process.
“We’re dealing with a complicated capital structure because Hughes is a tracking stock,” said Toni Simonetti, a GM spokeswoman. “The volatile equity markets have only added to the complexity. And there are two interested parties and a lot of issues to work through.” News Corp., the only serious bidder until EchoStar emerged three months ago, wants DirecTV to fill a U.S. void in its global satellite TV strategy. DirecTV would make News Corp.--already the nation’s largest television broadcaster through its Fox units--the country’s leading satellite operator, with 10.3 million customers.
A merger would catapult EchoStar, DirecTV’s only satellite rival in the U.S., to the top of the pay-television business. EchoStar would have a combined 16.8 million customers--more than the 14 million cable subscribers AT&T; serves.
Neither firm has made its final bid public, but both offers are expected to include stock as well as $4 billion or more in cash to satisfy GM’s demand for liquidity.
On Friday, EchoStar was still racing to finalize its financing.
Valued at about $29 billion, its bid tops News Corp.’s by several billion dollars. But the financial risks and regulatory hurdles of merging the nation’s only two satellite providers makes EchoStar’s deal less of a sure thing for GM.
News Corp. Chairman Rupert Murdoch has told GM he will pull his offer if the board stalls again, sources say. Murdoch was prepared in February, August and again last week to announce a deal, only to have GM balk.
But the clock is ticking for GM too. The auto maker’s credit rating was recently downgraded as margins evaporated on its car and truck sales. Analysts say GM needs a cash infusion to ride out the economic slowdown.
“During the last recession, GM ran at a $6-billion to $8-4 billion annual deficit,” said one auto analyst.
But some Hughes shareholders worry that GM is so eager to get its hands on cash that it will favor the security of a News Corp. deal over a risky EchoStar transaction that some say has greater long-term value.
“GM has positioned itself so that its interests are not aligned with Hughes shareholders,” said Kevin Risen, co-portfolio manager at Neuberger & Berman Guardian Fund, which was a large owner of GM and Hughes stock but sold those positions and now owns EchoStar and News Corp. shares.
But Risen and others doubt GM would risk a regulatory review that could take a year or longer and possibly end in rejection. GM was so nervous that it rebuffed EchoStar’s overtures until three months ago, when EchoStar controlling shareholder and Chairman Charles Ergen stunned the auto maker with an unsolicited bid.
Experts say regulators could favor a stronger satellite company to compete with cable, particularly if AT&T; and Comcast or Cox consummate a merger.
GM’s Simonetti acknowledged both the financial and regulatory risks of the EchoStar deal.
“If you don’t think you can consummate a transaction, it would be of no value to shareholders,” she said. “You want to make sure that the ongoing concern has enough financial flexibility to be viable.”
In either deal, GM probably would get mostly cash for its stake, leaving Hughes shareholders with stock and no cash option.
“GM can’t win a shareholder vote by cramming down a deal that gives Hughes shareholders a punk return, while taking a cash premium for itself,” Risen said.
Hubbard agreed. “A year ago, there was more room to play those games, but not now,” he said.
GM put Hughes on the block after pressure from Wall Street to sell what analysts viewed as a high-growth but nonstrategic asset. As DirecTV took off after its launch in 1994, so did the value of Hughes, which in 2000 was worth more than all of GM. Analysts say Hughes’ growth helped mask GM’s slide.
The auto maker’s reluctance to shed Hughes melted when corporate raider Carl Icahn threatened to accumulate GM stock last year to capitalize on a breakup value that was twice as much the whole.
Then came what News Corp. chief Peter Chernin recently called “the longest merger negotiation in the history of the world.”
Behind-the-scenes warring moguls were locked in conflicts of interest and boardroom ousters. The most dramatic twist came this spring, when Hughes chief Michael Smith was fired after trying to encourage a bid from EchoStar when GM was trying to finalize a deal with News Corp. Although Smith told investors he was trying to get a higher price for Hughes, some insiders accused him of trying to save his job, which News Corp. planned to eliminate.
Smith’s disruptive behavior was a sore subject at both GM and Hughes because of conflicts of interest that had long burdened--and embarrassed--top management at both companies. Smith is the younger brother of GM Chairman Jack Smith. Both executives were forced to recuse themselves from the talks with News Corp. because of the obvious conflict.
But a dozen sources at Hughes, News Corp. and on Wall Street say the situation was a key contributor to the delays in a sale. “Here GM was facing one of the biggest financial decisions in its history and the chairman was recusing himself?” said one source close to the situation. “The brothers created total paralysis at the top. Who in their right mind was going to make a decision with Jack looking over their shoulder?”
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GM’s Hughes Deals
June 1985: General Motors Corp. announces it will pay $5.2 billion in cash and special GM stock to acquire Hughes Aircraft, outbidding Ford Motor Co. and Boeing Co.
December 1988: GM enters secret arbitration to force a reduction in the price it paid for Hughes, saying it suffered tens of millions of dollars in unforeseen losses because of troubled defense contracts held by Hughes when the deal took place.
January 1997: GM agrees to sell the defense-related operations of the company, renamed Hughes Electronics Corp., to electronics giant Raytheon Corp. for about $9.5 billion.
January 2000: GM says it will sell Hughes’ satellite production division and two related businesses to aerospace giant Boeing Co. for $3.75 billion in cash.
October 2001: GM decides on rival bids from News Corp. and Echostar Communications Corp. for the remaining operations of Hughes Electronics Corp., including DirecTV. GM’s stake is worth an estimated $7 billion.
