The real GM story..
NEW YORK, Mar. 24 (Standard & Poor's) - The market value of General Motors Corp. (GM) shares soared by nearly $3.4 billion Thursday as media reports indicated that News Corp. (NWS) has considered bidding for the entire company -- as a means of acquiring the satellite business of GM's Hughes Electronics (GMH) subsidiary. While this may sound surprising -- and it's certainly unlikely to happen -- it's not unthinkable. So let's take a closer look.
Here's why News Corp. would wish to strike such a deal. Hughes Electronics' DirectTV unit would be a good strategic fit for the Australia-based global media giant, who wouldn't mind having a sizable U.S. satellite business. But GM has repeatedly said it is not interested in selling Hughes, which it considers a strategic and valuable asset.
This is where it gets interesting. How could News Corp.'s CEO Rupert Murdoch buy an asset that GM is not willing to sell? The answer: by buying all of GM and then keeping only the assets he wants.
Buy all of GM? What could he possibly be thinking? Well, let's first look at how GM's assets are valued to see how Murdoch could consider such a transaction.
The (Blue) book on GM
As of Thursday's close, the market valued the Hughes Electronics tracking stock at approximately $57 billion, of which 68% ($39 billion) is owned by GM. The automaker also has a 19.9% interest in Commerce One (CMRC), valued at around $2.9 billion, and held approximately $5 billion in net cash as of December 1999. Excluding minority ownership stakes in foreign automakers and billions of dollars of GM's pension and health benefits obligations, GM's holdings of non-auto assets are currently valued at approximately $46.8 billion. That's not much less than GM's overall $55.5 billion market value.
Ignoring, for now, other assets such as stakes in foreign automotive companies and GM's pension and health benefits obligations, that differential translates into [a market value of] just $13.60 per share for the automotive business.
Using a variety of measures, including a expected free cash flow (net income plus automotive depreciation and amortization less capital expenditures and cash dividends) and price to earnings, GM's automotive business is trading at a discount to Ford (F) its closest domestic competitor.
Car buyers?
Surely News Corp. does not want to enter the automobile manufacturing business. It would have to get rid of the auto business by either of two means: a sale or a spinoff.
A presale of the auto business to another party is unlikely, as there are only a limited number of possible buyers. Ford and DaimlerChrysler (DCX) are immediately excluded, as they would run afoul of the FTC if they bought GM. Renault has its hands full with Nissan. A combination of Volkswagen and GM's Opel unit could have too much European market share for the EU to countenance.
Toyota, with its substantial cash hoard and existing manufacturing partnership with GM would be the best candidate, but the challenge of tackling GM's immense bureaucracy to improve its lagging manufacturing operations would likely rule it out too. Unions, such as the United Auto Workers (UAW), would resist any change in company control they fear would lead to a restructuring that would lead to job losses for its membership.
So GM's would-be suitor is left with one other option: a spinoff. A spinoff would require management and union approval. If there was a change in control there could be an exodus of management, but some may stay with the more focused corporation. Here too, unions would likely resist any change in control of the company.
Of these two options, the most likely route is the spinoff. Either the shares could be given to shareholders as a dividend or the company could be taken public in an IPO. News Corp. could then keep a portion of the ownership interest to monetize this asset and recoup some of the value it paid to get control of Hughes.
Sticker shock
Still a deal would likely be hostile, and a premium to GM's market value would have to be paid. A 20% premium for change in control would not be unreasonable in this case, bringing the deal value to at least $66 billion, or $104 per GM share. Although the assumption of approximately $34 billion in unfunded post retirement benefits would limit the premium paid.
While News Corp.'s market valuation is greater than $200 billion, its cash on hand is only about $3 billion and it has $11.5 billion in long-term obligations. However, with assistance from its largest shareholder, Liberty Media Group, News could raise more money. Still, without funding from a presale of the auto business, unless News wants to risk damaging its stock price to buy GM, financing the transaction would have its challenges.
The bottom line is while we do not expect this deal to be consummated because of the factors mentioned above, it does point to the value inherent in the company. We currently have a STARS ranking of (accumulate) on General Motors stock. Why? We are bullish on Hughes Electronics's prospects and believe the automotive business's discount to its peers and the S&P 500 is overdone. Assuming the valuation of GM's non-automotive assets will be maintained or increased, and the discount assigned to its automobile business narrows, GM shares should see double digit gains.
APNT looks good too and the two charts...
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