Kerkorian Discloses GM Investment, Plans to Double It (Update9)
Bloomberg
May 4 2005
May 4 (Bloomberg) — Kirk Kerkorian, who shook up Chrysler Corp. with
a hostile takeover bid a decade ago, said he planned to double a
previously undisclosed stake in General Motors Corp. to 8.8 percent,
sending the shares to their biggest gain in more than 40 years.
Kerkorian’s Tracinda Corp. said in a statement today that it offered
$868 million for as many as 28 million GM shares at $31 each, raising
its holdings in the Detroit-based automaker to 50 million shares.
Kerkorian is buying the stock after a 42 percent decline in the past
12 months. The Los Angeles-based firm said the purchase is “solely
for investment purposes.”
“He’s going to put their feet to the fire like he did Chrysler,”
said John Kornitzer, who manages $5.5 billion at Kornitzer Capital
Management in Shawnee Mission, Kansas, including GM shares. “They’ll
get more lean and efficient. They’ll get tougher on the unions. It’s
good.”
The investment raises the prospect that Kerkorian, 87 will try to
shake the world’s biggest automaker out of a slump that led to its
lowest U.S. market share in 80 years and a $1.1 billion first-quarter
loss. Chief Executive Rick Wagoner must now contend with the specter
of an activist Kerkorian while trying to rebuild sales, develop better
vehicles and wrest health-care concessions from U.S. workers.
After Kerkorian bought shares in Chrysler starting in 1990, he
pressured the automaker to increase its dividend, buy back shares
and add a Tracinda employee to the automaker’s board.
Wagoner’s Steps
“We haven’t yet seen aggressive moves by Wagoner and his team,” said
Pete Hastings, a corporate bond analyst at Morgan Keegan Inc. in
Memphis, Tennessee. “They need to take some significant steps.”
GM shares rose $4.47, or 16 percent, $32.24 at 2:20 p.m. in New York
Stock Exchange composite trading. It’s the biggest gain in at least
44 years, according to Standard & Poor’s analyst Howard Silverblatt.
GM was upgraded to “neutral” from “sell” by analyst Merrill Lynch
analyst John Casesa. GM spokesman Tom Kowaleski declined to comment
on Tracinda’s bid.
The purchase would make Kerkorian GM’s third largest- shareholder,
according to data compiled by Bloomberg. Tracinda holds a controlling
interest in casino operator MGM Mirage. He is ranked 41st on the Forbes
list of the world’s wealthiest people, with a net worth estimated at
$8.9 billion.
Dividend
As part of Kerkorian’s offer, stockholders will be entitled to keep
GM’s 50-cent quarterly dividend, which is to be paid next month. On
that basis, the offer is a 13.4 percent premium over GM’s closing
price of $27.77 yesterday, Tracinda said in the statement.
GM’s 8.375 percent bonds maturing in 2033 rose about 3 cents to
79 cents on the dollar, yielding 10.8 percent, according to Trace,
the bond-price reporting system of the NASD. The bonds have weakened
since GM cut its annual profit forecast on March 16, falling to 72
cents last month, an all-time low.
GM’s bonds have been losing value because ratings companies say
they may further downgrade about $200 million of GM’s long- term and
short-term debt, excluding asset-backed bonds, most of which is at
its auto finance unit. Standard & Poor’s, Fitch Ratings and Moody’s
Investors Service rate GM at the lowest investment grade level.
Kerkorian, the son of an Armenian immigrant rancher in California’s
San Joaquin Valley, became a billionaire by buying airlines and
casinos for less than they turned out to be worth. He made his bid
for GM with the stock near a 13-year low.
First Airline
In 1965, Kerkorian invested $3 million in Trans International
Airways — an airline he had originally created — and later sold it
Transamerica Corp. for $149 million. He bought his first casino in
1967 and built the 1,500-room International Hotel, then the largest
hotel in Las Vegas.
He bought the MGM film studio for the first of three times in 1970.
His last MGM purchase was in 1996, for $1.3 billion in cash.
Kerkorian began buying shares in Chrysler Corp. in 1990 after the
automaker had a third-quarter loss of $214 million. He paid $12.37 a
share in December 1990 for his initial 22 million shares, then bought
6 million more shares at $10.13 each on Oct. 10, 1991, as the company
headed toward a full-year loss of $795 million.
He tried to buy all of the automaker in April 1995 for $21 billion.
While the effort collapsed when he couldn’t line up the financing,
he increased his stake and continued to exert pressure on the
company, giving his support to the 1998 combination with Stuttgart,
Germany-based Daimler-Benz AG.
Daimler Suit
Two years later, Kerkorian sued DaimlerChrysler AG and Chief Executive
Officer Juergen Schrempp after Schrempp told the Financial Times
he’d planned to take control of Chrysler following a deal that was
billed as a merger of equals. Tracinda last month appealed a lower
court ruling Kerkorian wasn’t duped about the 1998 transaction.
In December 2003 DaimlerChrysler lawyers estimated Kerkorian made
about $2.7 billion on his Chrysler investment when the company was
purchased by Daimler-Benz.
In buying GM shares, Kerkorian is “gambling that the shares can’t
go much lower and are going to go higher,” said Eugene Jennings,
a business professor emeritus at Michigan State University. “This
should indicate to the board what happens when you mismanage
shareholder value.”
Tracinda said it disclosed the investment as a tender offer in response
to rumors of the transaction circulated over the weekend.
Removing Doubt
The firm said it “decided to go forward with this tender offer to
remove any doubt in the marketplace as to its investment purposes,”
the company said in the statement.
GM, which is negotiating with unions to reduce the $5.6 billion
it expects to pay for employee health costs this year, on April
19 abandoned its 2005 profit forecast of as much as $2 per share,
excluding some expense, because of uncertainty about the outlook for
the year, particularly health care costs. It said it can’t project
earnings until it resolves the “health-care cost crisis.”
The Detroit-based United Auto Workers union declined to comment on
Tracinda’s announcement, spokesman Paul Krell said.
Tracinda, which was named for Kerkorian’s daughters Tracy and Linda,
may try to increase its holdings in GM if management isn’t aggressive
enough in addressing the waning profits, Morgan Stanley analyst Steve
Girsky wrote in a report to investors.
General Motors could raise as much as $14.2 billion if it sold its
residential mortgage and insurance units, Merrill Lynch said in a
March 24 report. As an alternative, the units may be spun off to GM
shareholders, the report said.
Tracinda’s investment “indicates to me that the headwinds the company
is facing seem to Kerkorian to be short-term in nature,” said Carol
Moreno, an analyst at TCW Group, which has $109 billion in assets,
including shares of General Motors. “I would imagine that he has been
in contact with management prior to this, and if anything, it gives
the impression that there is value to the stock and that management
is on the right track.”