GM to Seek Bids for Hughes Electronics?

12/09/96

Reuters reports that industry analysts expect General Motors to seek bids for the defense divisions of its Hughes Electronics Corporation subsidiary. The predicted move will be the first step moving GM toward selling all of its remaining non-automotive assets. GM bought Hughes for about $5 billion in 1985, and the expected trade of its defense operations is expected to ring in at a value of up to $8 billion. Analysts have been speculating about what GM would do with Hughes in recent months, and its trade is the latest possibility to raise its head.

CS First Boston defense analyst Peter Aseritis said, "I think the GM board and Hughes Electronics management are very interested in divesting the defense business, merging the Delco Electronics unit with the Delphi components business, and spinning off the communications business into a separate company." He added, "my sense is that they want to find a merger partner for the defense business first."

The idea that GM would divest itself of Hughes' defense business was first reported in the Wall Street Journal, and analysts have indicated several candidates for possible buyers, including McDonnell Douglas Corp., Raytheon Co., and Northrop Grumman Corp. GM has declined to comment on the possibility, calling the reports speculation: "I have to classify it all in the realm of speculation, for which we have no comment," said GM spokesperson Toni Simmonetti.

GM did file a document with the Securities and Exchange Commission recently that said Hughes wants to "strengthen its leadership position through acquisitions, consolidations, realignments and divestitures," and other actions.

Defense industry analysts consider Hughes' missile systems, radar, electronic warfare, thermal imaging, information systems and other defense units attractive to the defense industry. Hughes' defense interests earned operating profits of $688 million on revenues of $5.95 billion in 1995.

Analysts predict that McDonnell Douglas is ready for an acquisition, but that company declined to confirm any specific bidding activity, although it did acknowledge that it was interested in Hughes. A McDonnell Douglas spokes person said that McDonnell President Harry Stonecipher "has gone on record saying that he is interested in making an acquisition. He finds Hughes an interesting choice."

Analysts point out that any transaction involving Hughes would have to account for tax considerations for GM and its Class H shareholders. Shareholders of GM Class H stock are entitled to dividends based on Hughes' earnings while GM owns the subsidiary's assets, so a straightforward sale of Hughes would create a major tax liability for GM. Therefore, analysts predict that GM was more likely to pursue a non-cash transaction, such as a stock swap or other type of deal that could take some time to structure.

The sale of Hughes' defense business would clear the way for GM to consolidate its Delco Electronics unit (making audio systems and other components) into its Delphi Automotive Systems. Such a move would allow GM to spin off Hughes' lucrative telecommunications and space segment into a separate company. Hughes' telecom division is experiencing tremendous growth because of the boom in popularity of its DirecTV satellite broadcasting service.

Paul Dever -- The Auto Channel