Kerkorian popped up as a big shareholder in General Motors Corp. recently, making a tender offer for additional shares in the automaker at 12% higher than the market price. Since then, GMs prospects have worsened and Kerkorian has kept right on buying. He purchased 13.1 million shares in August and September and 2.1 million in October. That gave Kerkorian a total of 56 million General Motors shares, or 9.9% of the Detroit-based companys total. Hes the largest GM shareholder after two money management companies and has said he might seek a seat on GMs board of directors.
Kerkorians stake in the carmakers stock has cost him $1.68 billion, an average of $30 a share. The man can afford the risk. His 56% stake in Las Vegas-based gaming and hotel enterprise MGM Mirage is worth about $6 billion. With only an eighth-grade education, Kerkorian has mastered investor maths. He made a bundle on the old Chrysler Corp in the 1990s and has bought and sold the MGM movie business to his advantage.
But General Motors The best Kerkorian can say about the worlds largest vehicle manufacturer is that its a contrarian investors dream. Old-timers like Kerkorian can remember GMs glory days in 1962 General Motors accounted for 51% of US car sales about double its current market share.
The GM of today has lost money in each of the last four quarters, a total of $3.9 billion. Its stock has been mostly a disaster since peaking at $94.63 in April 2000. The company has too many factories and too many versions of its Chevrolets, Pontiacs, Buicks and Cadillacs. High gasoline prices cloud the future of GMs profitable but gas-wasting light trucks.
GM got a break on the cost side last week when the United Auto Workers union agreed to cuts in health benefits that will save the company $1 billion a year and $15 billion in long-term retiree benefits. That saving could be overwhelmed by other GM costs.
The company may, for instance, be on the hook for pension liabilities at parts-maker Delphi Corp, which GM spun off in 1999 and which filed for Chapter 11 bankruptcy last month. GM Chief Executive Richard Wagoner has said he might raise cash by selling a stake in the profitable finance affiliate, General Motors Acceptance Corp.
General Motors also has been caught in the accounting problems haunting US industry. The company said it overstated 2001 profit by as much as $400 million by booking savings from transactions with suppliers at the wrong time. The US Securities and Exchange Commission is investigating GMs reporting of pensions and other retiree benefits.
The financial markets treat General Motors like a company headed toward bankruptcy court. GM stock yields 8.4%, compared with the 2.5% average for GM and the other 29 stocks in the Dow Jones Industrial Average. GM bonds due in 2033 and rated as junk trade at about 67 cents on the dollar, yielding 12.7% against 4.8% on benchmark 30-year US Treasury bonds.
Kerkorian can ignore the daily fluctuation in General Motors shares. Since he bought in, the stock has been as high as $37.52, giving him a nice paper profit at the time. Any paper loss can be offset at least in part by the $28 million dividend he stands to get from GM each quarter. What if General Motors, seeing its cash dwindle, cuts or eliminates the dividend Kerkorian probably would just buy more shares.