Investors in troubled General Motors Corp. were betting Wednesday that 87-year-old billionaire Kirk Kerkorian’s surprise proposal to acquire a large stake in the company could be a catalyst for better times at the world’s largest automaker.
GM shares soared more than 18 percent Wednesday after Kerkorian’s Tracinda Corp. offered to pay almost $870 million for a nearly 5 percent stake. That would boost Tracinda’s holdings to about 9 percent and make Kerkorian one of GM’s largest shareholders.
GM shares fell to a 10-year low in April after the company reported a $1.1 billion loss for the first quarter. Its sales have slumped in recent months, including those of its most profitable sport utility vehicles, as gasoline prices marched higher. And while GM executives complain about huge increases in medical insurance costs, the United Auto Workers union has said it’s not interested in reopening contract talks before 2007 to address those expenses.
Tracinda officials said Kerkorian would have no comment beyond the statement released early in the day saying the proposed purchase was for investment purposes only. But his motives prompted speculation on a variety of scenarios, including that he might desire a controlling stake in the automaker.
“His history is that he’s never been a passive investor in any of the companies he’s gotten involved with,” said Burnham Securities analyst David Healy.
Beverly Hills, Calif.-based Tracinda is the majority owner of casino and hotel operator MGM Mirage Inc. It was the largest shareholder in Chrysler Corp. when the automaker merged with DaimlerBenz in 1998.
Kerkorian, whose net worth is estimated at $8.9 billion by Forbes, is Tracinda’s sole shareholder.
Tracinda said it was willing to buy up to 28 million GM shares for $31 apiece in cash, an 11.6 percent premium over GM’s closing stock price Tuesday. But Wednesday’s runup pushed GM’s share price above that level. The shares jumped $5.03 to close at $32.80 Wednesday on the New York Stock Exchange.
GM said in a statement late Wednesday that it “typically does not express a view on specific investor activity,” but added that “GM’s board and management are committed to enhancing shareholder value for all of our investors.”
The automaker said Tuesday its U.S. sales fell 7.7 percent in April, another disappointing showing. So far this year, GM’s U.S. sales are off nearly 5 percent.
A big concern for investors is the potential that rating agencies might downgrade GM’s debt to junk status, which would significantly increase the company’s future borrowing costs. Standard & Poor’s says GM’s unsecured debt is roughly $200 billion.
In a research note Wednesday, Merrill Lynch analyst John Casesa changed his rating on GM stock from sell to neutral, “given Kerkorian’s successful track record of unlocking shareholder value.”
“There is no doubt in our mind that Tracinda’s interest is not in the auto business, but rather in unlocking value embedded in noncore businesses, including GMAC’s non-auto subsidiaries,” said Casesa, referring to GM’s highly profitable financing arm.
For all of 2004, a year in which GM earned $3.7 billion, GMAC reported a record profit of $2.9 billion, up from $2.8 billion in 2003.
GM has said GMAC expects to generate net income of at least $2.5 billion in 2005. But the company’s automotive operations, which lost $1.3 billion in the first quarter of 2005, remain a big question mark.
Casesa said he expects the automaker “to react vigorously and defiantly to Tracinda’s actions.”
“Given GM’s still considerable economic and political clout, we expect this to be a long, drawn-out battle,” he said.
Healy said it’s unlikely Kerkorian will gain a controlling interest in GM, but a 9 percent stake should give him enough clout to have input with top management.
“But it doesn’t mean they have to listen,” said Healy, who noted he holds no stock in automotive companies but does own GMAC bonds. “It could be a distraction. He was a major nuisance to Chrysler for years, and still is for that matter.”
Kerkorian sued DaimlerChrysler AG in 2000, claiming DaimlerBenz engineered a takeover of Chrysler, then cheated him out of billions by casting the deal as a merger of equals.
Kerkorian alleged DaimlerBenz saved billions on the transaction by not pursuing a true acquisition of the company. DaimlerChrysler insisted the business combination was a merger of equals and that Kerkorian grew disgruntled when the stock price fell.
U.S. District Court Judge Joseph Farnan Jr. ruled against Kerkorian last month following a 13-day bench trial in Wilmington, Del., that ended in February 2004. Kerkorian has appealed the decision.
Tracinda, which already owns a 3.9 percent stake in GM, would hold 50 million GM shares, or 8.84 percent of the automaker’s outstanding shares, if it completes the offer. The only larger shareholders would be two money management firms, State Street Bank and Trust Co. of Boston, which has a 17.7 percent stake, and Capital Research and Management Co. of Los Angles, with a 11.5 percent stake.
GM is scheduled to hold its annual shareholder meeting June 7 in Wilmington, Del.