GM and the Case of the Bumbling Billionaire
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Call it a case of a bumbling billionaire.
That, in effect, is how some investment professionals view Kirk Kerkorian’s enthusiasm for General Motors, the much troubled king of the auto makers, whose woes grew this week when it was disclosed the Securities and Exchange Commission was investigating its pension obligations and dealings with auto supplier Delphi.
A high school dropout, Mr. Kerkorian, the reclusive 87-year-old billionaire son of an Armenian immigrant, holds a 9.9% stake in GM and undoubtedly believes it can get out of its financial ditch and switch to the fast lane of the investment highway.
Clearly, though, Mr. Kerkorian, who has reaped huge profits over the years on such investments as the MGM Grand hotel and Chrysler, and has an estimated net worth of $8.9 billion, is not a fella to be taken lightly.
But even billionaires blunder, as shown by some well-publicized investments that went sour. Included here:
* Ron Perelman’s stakes in such companies as Revlon, Sunbeam, and Marvel Entertainment, all stock market disasters.
* The Hunt brothers’ holdings in silver.
* Saudi Prince Alaweed bin Talal’s interest in Priceline.com.
* Corporate raider Carl Icahn’s dead money investment in Time Warner.
I couldn’t reach Mr. Kerkorian directly, but several Wall Street trackers of GM say his thesis is fairly obvious. Namely, the automaker will downsize, dramatically cut costs, stem the heavy flow of red ink, and doctor up its debt-ridden balance sheet – a variety of corporate surgeries designed to ensure survival, bolster its sagging credit rating, and re-enforce its global competitive position.
Sounds good in theory, but some investors, such as Colorado’s Robert Holmes, a former president of Gilford Securities, think it would be easier turning around the Titanic than achieving such a goal.
GM has embarked on a number of actions aimed at getting its house in order, such as sizable layoffs, a $1 billion reduction in health care costs, and plans to sell a controlling interest in General Motors Acceptance Corporation, its profitable finance arm. A 51% stake in GMAC is estimated to be worth between $12 billion and $14 billion.
An economist at the University of Maryland, Peter Morici, views such actions as futile. Noting that GM is losing money at the rate of $4 billion a year, he says that “about the only thing that can allow GM a chance to recover and restructure itself is for the firm to go for Chapter 11” – in other words “declare bankruptcy and get new management in there.”
Mr. Holmes echoes such thinking. “The odds are very high GM will have to file bankruptcy at some point,” he says. Its business, he adds, has huge embedded costs and the partial givebacks it has gotten on health care and pension costs are not enough to bail it out. GM’s cost structure and its faltering competitive position, he believes, will put unrelenting pressure on the bottom line, in turn paving the way for bankruptcy.
Given his bleak outlook, Mr. Holmes, following the spike in GM shares after the announcement of Mr. Kerkorian’s stake, sold the stock short (a bet its price will fall).”If I’m right, and I think I am,” he says, “the stock (which closed yesterday at $27.19) will trade in the low single digits, which is what I expect.”
The automaker, in response, notes it has never said bankruptcy is a viable alternative.
Maybe not, but judging from GM’s latest short position – a whopping 64.3 million shares – it’s clear many investors are sympathetic with Mr. Holmes’s thinking and in this instance appear to regard Mr. Kerkorian, as one analyst describes him, “as little more than an aging and bumbling billionaire who is out of touch with economic reality.”
A Merrill Lynch analyst, John Casesa, seems to share this view. Detroit is at the tipping point, he says. “The domestic auto industry’s structure is not stable, and simply put, “we expect it will get worse before it gets better.” Referring to both GM and Ford, he thinks each stock should be sold, arguing that based on his new and much lower estimates, they both appear overvalued. In GM’s case, he sees losses of $3.96 a share this year and $0.25 in 2006.
Martin Weiss, the editor of the Safe Money Report, a newsletter out of Jupiter, Fla., also takes a dim view of GM. Noting its finances are so bad, especially its staggering $284 billion of debt, Mr. Weiss thinks it’s “insane” for any investor to buy GM shares.
Standard & Poor’s also thinks Mr. Kerkorian is blindsighted. It sees GM’s roughly 7% dividend yield subject to a significant reduction and is telling investors, “We strongly recommend selling the stock.”