Speculation Grows With Kerkorian’s GM Stake
Los Angeles billionaire Kirk Kerkorian nearly doubled his ownership in General Motors Corp. on Wednesday, heightening speculation on Wall Street about his next move with one of America’s most storied companies.
Kerkorian completed a purchase of GM stock -- giving him 7.2% of the company and making him the third-largest shareholder -- a day after the automaker unveiled a broad restructuring aimed at lifting GM from its deep U.S. sales slump and reversing a $1.1-billion first-quarter loss.
The growing involvement of the 88-year-old Kerkorian, a legendary investor who shook up Chrysler Corp. with a failed takeover bid a decade ago, is seen as giving GM even more impetus to quickly find ways of braking its decline.
“With Kerkorian breathing down your neck, you may be spurred to do something faster than you had planned,” said James Hossack, an analyst at AutoPacific Inc., an automotive consulting firm in Tustin.
The big question is whether Kerkorian is content to let GM and its chief executive, Rick Wagoner, sort out the company’s problems.
Other analysts suggest that Kerkorian will quietly put pressure on GM to further overhaul its business. He has followed this script before.
In the early 1990s, for instance, Kerkorian steadily amassed a 10% stake in Chrysler without indicating that he wanted to own the company. Then, in 1995, he stunned the automotive world by launching a $20-billion hostile takeover bid in partnership with former Chrysler Chairman Lee Iacocca. He also put an ally on Chrysler’s board of directors and continued to push for changes.
His takeover bid failed when he and Iacocca couldn’t line up enough financing, a setback that briefly tarnished Kerkorian’s reputation as a savvy investor. But three years later Chrysler merged with Daimler-Benz to create DaimlerChrysler, and Kerkorian reaped a multibillion-dollar profit from his Chrysler holdings.
Kerkorian’s silence about GM has unleashed a variety of theories about his motive.
Some speculate that he has simply made an astute investment, buying shares of a battered yet venerable company at its trough.
Long regarded as a shrewd, independent-minded investor, Kerkorian started buying GM’s stock this spring shortly after the automaker’s stock plunged to a 12-year low because of its sinking vehicle sales and higher operating costs.
He bought his initial 22 million shares of GM at an average cost of $26.33 a share, or $579 million, and could do so quietly because investors don’t have to disclose their holdings until they acquire 5% of a company. Based on Wednesday’s closing price of GM’s stock, Kerkorian already has made a paper profit of $5.69 a share, or $125 million, on that initial investment alone.
There also have been suggestions that GM might spin off part of its profitable financial services division, General Motors Acceptance Corp., as a way to provide shareholders with more value for their shares. Wagoner said Tuesday that GM was evaluating GMAC.
“Selling the [GMAC] mortgage and insurance businesses alone would probably yield $10 billion in proceeds,” analyst Himanshu Patel of J.P. Morgan Securities Inc. said in a note to clients Wednesday.
Whether Kerkorian and other shareholders would see any of that cash is another matter.
GM is grappling with $250 billion of long-term debt, rising healthcare costs and $87 billion of pension liabilities. Some analysts also have said that because both the automaker and the financial services business are so interrelated, separating them carries risks.
Kerkorian’s investment firm, Tracinda Corp., has said its interest in GM is “passive,” meaning it has no plans to wage a proxy fight to oust GM’s board of directors or attempt a takeover of the company.
Tracinda has said it believes that GM has the wherewithal to improve its fortunes, but it hasn’t been more specific. And the always reserved and publicity shy Kerkorian -- whose net worth is nearly $9 billion, according to Forbes magazine -- declined to comment Wednesday.
Kerkorian, a longtime dealmaker in Hollywood and Las Vegas, where he still controls hotel-casino powerhouse MGM Mirage Inc., isn’t one to telegraph his strategy. He dropped a bombshell last month when Tracinda said it owned 4% of GM and offered to buy an additional 28 million shares from investors for $31 a share.
His tender offer ended Tuesday, and Tracinda said it yielded 19 million shares at a cost of nearly $590 million. The fact that Kerkorian could not acquire the full 28 million shares he offered to buy was a sign to Wall Street that many investors wanted to keep their shares or wait to see whether Kerkorian makes a new, higher offer, Efraim Levy, an equity analyst with Standard & Poor’s Corp. in New York, told Bloomberg News.
Indeed, after Tracinda’s announcement Wednesday, GM’s stock rose $1.29, or 4%, to $32.02.
GM’s Wagoner remains under pressure to turn around the company. Last month, GM’s bond rating was cut to “junk” status because of its weak sales.
On Tuesday, Wagoner announced plans to cut the Detroit-based company’s North American workforce by 25,000, or about 14%, with a stepped-up attrition program and the closing of several factories over the next three years. GM’s brands include Chevrolet, Pontiac and Cadillac.
GM’s share of the U.S. auto market dropped to 25.7% in the first five months of this year, about half of what it was 40 years ago. Yet after decades of downsizing, GM still has too much manufacturing capacity.
Analyst Hossack also cautioned against expecting quick change at GM, which had 2004 sales of $193.5 billion.
There is no easy solution to the company’s flagging sales and declining share of the U.S. auto market, nor a quick fix for its burdensome healthcare and pension obligations.
“They are in an extremely difficult position,” Hossack said.
