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Kerkorian pulling out of Ford, taking huge loss

Kirk Kerkorian has sold 7.3 million of its shares in Ford and plans to further cut what is now a 6.1 percent stake, for a potential loss of more than half a billion dollars on the investment.
/ Source: The Associated Press

Billionaire Kirk Kerkorian’s investment firm said Tuesday it sold part of its stake in Ford Motor Co., taking millions of dollars in losses on the investment and marking an abrupt about-face from the optimistic expectations he had for the automaker just four months ago.

But while the move doesn’t bode well for Ford, industry observers said it may be more of a personal finance decision for Kerkorian, who has taken much larger losses on his majority stake in casino and hotel operator MGM Mirage Inc.

Tracinda Corp., which sold the 7.3 million Ford shares at an average price of $2.43, added that it plans to further cut what is now a 6.1 percent stake in the No. 2 U.S.-based automaker, for a potential total loss of more than half a billion dollars. The company said it may sell its remaining 133.5 million shares depending on market conditions.

Other investors followed Kerkorian’s lead and sold their Ford shares amid a drop in the overall market. The automaker’s shares fell 16 cents, or 6.9 percent, to $2.17.

Kerkorian has tried to leave his mark on all three of the Detroit automakers over the past decade. But Tracinda said in a Securities and Exchange Commission filing Tuesday that, in light of current economic conditions, it now sees “unique value” in other industries such as gambling, hotels, and oil and gas, so it’s moving its resources to those industries.

Tracinda spokeswoman Winnie Lerner declined to comment beyond the SEC filing.

Aaron Bragman, an auto analyst with the consulting company Global Insight, said Kerkorian’s decision may indicate the 91-year-old is consolidating his investments in the face of mounting overall losses rather than escaping than the slumping automotive industry or problems at Ford.

Kerkorian’s Ford-related losses pale in comparison to those he has taken at MGM, which has seen its shares plunge to $14.41 Tuesday from $91.95 at this time last year. Bragman pointed to Kerkorian’s move last week to pledge another 50 million shares of MGM stock as collateral to back a credit line used to buy Ford shares. Putting more of his MGM shares at risk could jeopardize his control of the company as well.

“It’s very unusual move for him to sell low like this,” Bragman said. “But MGM has lost more than 80 percent of its value, so it may have been something he was forced to do.”

Tracinda sold the Ford shares just four months after it purchased 20 million shares of the Dearborn, Mich.-based automaker at market rates, boosting the firm’s stake to 6.49 percent. Those purchases were announced two days after Kerkorian met with Ford Chief Executive Alan Mulally and Executive Chairman Bill Ford to discuss the company’s turnaround plan.

A week earlier, Kerkorian had acquired another 20 million shares through a tender offer for about $170 million, or $8.50 per share. Based on that share price, Kerkorian lost about $44.3 million in Tuesday’s sale.

At the time the tender offer was announced, Tracinda said it owned 100 million Ford shares at average cost of $6.91 per share. If the firm sold those shares at Tuesday’s closing price of $2.17 apiece, it would translate to a loss of about $474 million.

In announcing the June tender offer, Tracinda said it believed that Ford was starting to make progress on its restructuring plan, adding that it expected the automaker to post continued improvements.

Like the other U.S. automakers, Ford has struggled in recent years to right-size itself and return to profitability by shuttering plants and dramatically downsizing its U.S. work force. Kerkorian’s June investments had been seen as vote confidence in those efforts.

But in the months since, high gas prices, a slumping overall economy, low consumer confidence and the tightening of credit markets have taken their toll on the automaker and the industry overall.

Ford shares are down 63 percent since the tender offer was announced. On Oct. 10, they hit $1.88, marking their lowest level since April 19, 1983, according to the Center for Research in Security Prices at the University of Chicago.

Pete Hastings, senior analyst with Memphis, Tenn.-based Morgan Keegan & Co., said Kerkorian’s move reflects the “abysmal conditions” in the overall auto industry, citing the steep drop in U.S. vehicle sales this year and expectations that things will not improve in 2009.

“He saw what he thought were depressed prices in the industry and thought there would be a turnaround, but was surprised at the severity of the U.S. recession,” Hastings said.

The energy sector, one of the areas where Tracinda said it plans to move its money, is a much less risky place to invest than the automotive industry, Hastings said.

Bragman said that while Kerkorian’s underlying motivations may not be related to Ford, the automaker could lose an important financial safety net if Kerkorian were to completely pull out.

“Kerkorian was always seen as a kind of savior for Ford,” Bragman said. “His pockets were seen as a last source of financing, and if this is him saying ‘I can’t help you any more,’ Ford may have lost an exit strategy.”

Ford spokesman Mark Truby said the company did not know about Kerkorian’s plans until after Tracinda’s regulatory filing.

“We remain confident in and focused on our plan to transform Ford into a lean global enterprise delivering profitable growth for all,” he said.

Kerkorian has a mixed track record with the other U.S. automakers. He made an unsuccessful $4.5 billion cash offer for Chrysler last year and pushed for General Motors Corp. to form an alliance with Nissan Motor Co. and Renault SA in 2006. He acquired nearly 10 percent of GM and won a seat on the Detroit automaker’s board for Jerome York, one of his advisers.

But Kerkorian sold his stake in GM after the proposed alliance was scrapped following three months of negotiations.

Tracinda also was Chrysler’s largest shareholder at the time of its 1998 combination with Daimler-Benz. He sued the combined company in 2000, claiming Daimler engineered a takeover of Chrysler, then cheated him out of billions by casting the deal as a merger of equals. A federal judge rejected his claim.