Posted by: David Kiley on October 21, 2008
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.