Kerkorian Selling Ford: A Sign That Time Is Not On Detroit's Side

Posted by: David Kiley on October 21, 2008

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Kirk Kerkorian’s sudden divestiture of Ford shares is an indication of just how long it may take for Ford and Detroit’s other two automakers to come back to a point where investments made prior to this month will see daylight.

Kerkorian, the head of investment group Tracinda Corp. surprised some by buying into Ford last Spring. The nonagenarian mogul, whose investments in hotels and casinos have been far more successful than his forays into the auto industry, could never hope to exert much control at Ford, even with his 6.5% stake. Control of Ford’s board really rests with the Ford family and its Class B voting stock. But Kerkorian saw Ford as a good investment, and felt he was buying low at an average share price of around $7.10.

That was then. The collapse of the credit market, stock market and the mounting Recession has driven demand for new autos to a sixteen year low. Ford shares recently traded below $2.00 ashare. And prospects for 2009 aren’t looking any better for the automaker. In fact, most estimates are that next year will be worse than this year, with any kind of recovery in consumer spending and demand for new autos not surfacing until well into 2010.

All this has hit the automakers at a time when all Three U.S. manufacturers were already amidst extensive restructuring programs. The hit Kerkorian is taking on his Ford investment, if he sells it all, is substantial. Last Spring, Kerkorian bought 140.8 million shares of Ford common stock for about $1 billion, or an average price of around $7.10 per share. He sold 7.3 million shares on Monday at an average price of about $2.43, according to a regulatory filing. That’s about 66 percent below the average price at which he bought his stake. If he sold his entire stake, which is a possibility, at about that same price (or lower, since his sell-off is depressing the share price), he would have lost about $666 million on his Ford bet. Ford closed at $2.33 yesterday, and is down more than 6% in mid-day trading.

There is some speculation in the market that Kerkorian is booking the loss to off-set a gain he made earlier in the year for tax purposes. But it is also evident that it could take at least a couple of years, if ever, for his investment in Ford to be whole. It is also evident that Kerkorian needs to raise cash. Kerkorian received a $600 million loan earlier this year from Bank of America for which he pledged 50 million shares of MGM Mirage, or about one-third of Tracinda’s holdings. Since his loan, MGM shares have sunk to $13 from $53. Today, Kerkorian had to pledge an additional 50 million shares for bank loans.

Kerkorian said last Spring, and has maintained since, that he thinks Ford CEO Alan Mulally’s plan for Ford’s recovery is a good one. Indeed, according to most analysts, Mulally’s cost cutting and stream-lining of Ford’s global operations is the right path, and long overdue. Mulally has also been making huge changes to Ford’s culture, so that it brings more and better product to market faster.

But it may be too late given the Recession. Fitch Rating Ltd., for example, has speculated that the automaker may be down to $8-$10 billion in cash by the second half of 2009 at its current rate of cash burn. Ford is expected to announce its third quarter earnings in the first week of November, and the company will update investors and the public on its liquidity and cash burn.

Kerkorian, of course, had previously owned big stakes in Chrysler and General Motors. He owned a chunk of Chrysler at the time Daimler-Benz bought the automaker in 1999. Kerkorian later sued the German automaker for misleading him about the deal being a “merger of equals” rather than the takeover it turned out to be. In 2006, Kerkorian bought a chunk of GM, enough to get him a seat on the board, and then tried to force an alliance deal between the automaker and Renault-Nissan. Talks between the automakers, half-hearted on the part of GM, didn’t go anywhere, and Kerkorian later sold his shares.

Reader Comments

Dearborn Observer

October 21, 2008 3:30 PM

Good riddance. Kerkorian has been nothing but an unwelcome distraction to the management of the Detroit 3 at best, and his expensive retreat couldn't have happened to a nicer guy.

Karl

October 21, 2008 4:23 PM

Dear Mr. Kerkorian, QUOTE: "If sale are going down, so should the stock." - Harvard Business Professor, to his class in late 2004. To read what ELSE the good Professor said, simply 'Google' this- RIP OFF REPORT FUEL FREEDOM INTERNATIONAL MPG CAPS, and go to the 2001 Toyota Tacoma Report, and then to the 'Update' entitled- "Blame it on a Lawyer". Go Harvard!!!!! Go BusinessWeek!!!!!

Squeezebox

October 21, 2008 5:34 PM

If Kerkorian really wants to make a difference @ Ford, he should wait until the stocks are in penny territory, then buy straight from the family. I'll bet lots of Ford descendants want out badly right now!

Richard

October 21, 2008 7:36 PM

Yeah, good riddance to Ford as well. With their gas-guzzlers causing hundreds of billions to be sent out of the country, they are a drag on the economy.

DSleik

October 21, 2008 7:52 PM

They should have sold the shares of CHRYSLER to Kerkorian instead of those 7 hedgefund whores from Daimler-Benz because he could have saved Chrysler from being sold off which is what they probably will do.Maybe with Kerkorian he would have brought back Lee Iacocca and bring back the glory days of Chrysler Corp

Big 3. Not.

October 21, 2008 7:54 PM

The Big 3 should just die and get reborn as slimmer more efficient companies. Legacy cost and inefficiencies. Made in America.

Norman

October 21, 2008 7:55 PM

With a $666 million loss its not a sign that Ford is in trouble its a sign that the old man is losing his marbles. Time for an executor.

cok manger

October 21, 2008 8:16 PM

My hot dog smells like hot stinky goat cheese

SuM

October 21, 2008 8:48 PM

Im down 30% and loving what is happening to the global economy. I believe in capitalism and bailing out bad businesses is no ones responsibility. I am happy owners of large GM/FORD SUV's have come to terms with as much as $18k went right to the company's bottom line and not into their gas guzzling junkers. I love the idea that our "Big Three" automakers are hanging by thread because they were so set on screwing us on SUV sales. Toyota was taking on average $800.00 to its bottom line on each Camry sold. Now compare that to the greedy bastards at other company's. You made your ****ing bed now lay it and be gone.

It seems like only yesterday it was cool to drive a Hummer or a Suburban, pretty embarrassing now days I think we can all agree.

OUR government better not give them one additional CENT, let these clowns FAIL for christ sake..

Joe the Plumber

October 21, 2008 9:32 PM

It just goes to show you even the casino owners take risks and from the looks of this he would be better off waiting this one out unless he just needs the cash.

Taffy

October 21, 2008 9:40 PM

Too bad GM did not get together with Renault-Nissan, that would have turned out in GMs favor. Oh well.

Manok

October 21, 2008 9:53 PM

Kerkorian saw value in the automakers, but not in their current way of operation. If the U.S. car manufacturers could return to profit they'd be in a position to "rule the world", once more, and Kerkorian would make a killing.

The value is potentially there. However, the U.S. car manufacturers and the unions have resisted drastic changes. The (Bush) govt kept the car standards terribly low. In booming times Detroit could not make a (decent) profit.

So without protectionists moves they're doomed; the 25 billion the car industry has asked for is going to last them just 9 months or so.

PacificGatePost

October 21, 2008 11:27 PM

AMERICAN CAPITALISM IS ABOUT TO CHANGE

Don't let politicians, particularly the next President-wanna-be implement legislation that will deconstruct the system at the core of American society.

http://pacificgatepost.blogspot.com/2008/10/capitalism-political-punching-bag.html

Dearborn Avoider

October 22, 2008 10:28 AM

Good point Observer,

Imagine the gall - expecting input into how a company is run after investing a measly $1 billion dollars. Especially since Ford is so obviously well run. I heard rumors that Kerkorian also expected a return on his investment! I mean really - WTF was he thinking?

John

October 22, 2008 11:45 AM

Yes because the Detroit 3 have been so forward thinking that the best vehicles can must is between 15 - 20 MPG, but NOW magically 50 - 100 mpg is the goal set... seems they had to go broke before WE THE CONSUMER might actually get a valuable product of course the value will be lost on us as the oil rich countries will still make their bounty.... He's the last person to worry about. Our automakers deserve what they are getting!

jake38

October 22, 2008 1:05 PM

The only reason these money losing operations have gotten the credit extended from banks in the recent past has been the implied assurance the federal treasury will bail them out.

jake38

October 22, 2008 1:07 PM

The only reason these money losing operations have gotten the credit extended from banks in the recent past has been the implied assurance the federal treasury will bail them out.

Mens Option

October 25, 2008 6:50 AM

Harsh times...what can I say? They should have considered green energy as an option long time ago

ford phil.-eric herrera

October 28, 2008 10:24 AM

here in philippines we're still hoping that Kerkorian will still able to cope up all the financial crisiss he still facing and soon again be number 1 in automotive industry...we won't loose hope.

Tom Smith

November 7, 2008 7:27 AM

I met Kirk Kerkorian nearly 30 years ago. Those of you who ridicule him, are simply playing into the hands of the socialists. If you think the new nerd is better than Bush, think again. When he says share the wealth, he is talking about your wealth, not Kirks. As long as you are dumb enough to go gamble your losses away, you deserve what you get - nothing.. Kerkorian is a man with vision and creativity. In my 73 years I have met only three people with his talents. His main talent is not his money, but his creativity. Just watch and weep. The big three? - It has been predicted for 40 years. If they get bailed out, it means they will just pocket more retirement for the lames on top. America is almost gone, thanks to the antics of Clinton and now Obama.

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