Sept. 11 (Bloomberg) -- Money manager O. Mason Hawkins sold the General Motors Corp. common shares his firm has held for almost a decade, replacing the 7.9 percent stake with convertible bonds that offer a higher yield and less risk.

Southeastern Asset Management Inc. disclosed the transactions in two regulatory documents filed yesterday, one of which reported that the Memphis-based firm now holds almost 33 percent of GM's Series B senior debentures. The bonds have a yield of about 12 percent and are convertible into 13.2 million GM common shares, the equivalent of a 2.3 percent stake.

By switching from common stock to convertible bonds, Hawkins is reducing the risk on his GM investment in the event the company seeks bankruptcy protection, since lenders and bondholders would have a senior claim on assets. At the same time, the bonds have less potential for future price appreciation than the common shares. Southeastern was the third-largest GM stockholder as of June 30.

``This is a much safer way of having exposure to a company like this'' said Thomas Dinsmore, chief executive officer of Dinsmore Capital Management Inc., a Morristown, New Jersey, firm that runs the Ellsworth and Bancroft convertible funds. ``Clearly if the company were to declare bankruptcy, you would have rights that you did not have as a common shareholder.''

GM, the world's largest automaker, has been dogged by speculation that declining profits, along with billions of dollars in debt and pension obligations, may eventually force the company to file for bankruptcy protection. The company has denied on its Web site it is seeking bankruptcy protection.

`Continued Confidence'

Andrew McCarroll, Southeastern's general counsel, confirmed that the firm had sold its GM common stock and invested in convertible bonds. He declined to comment further.

GM spokeswoman Renee Rashid-Merem said, ``We are encouraged in Southeastern's decision to maintain a significant stake,'' adding that the convertible-bond purchases showed ``continued confidence in the company.''

Southeastern is also cashing out its GM stock at a time when convertible bonds are trading at bargain-basement prices, said Robert Butman, president of Context Capital Management LLC, a Stamford, Connecticut, money-management firm that invests in convertibles. Hedge funds that engage in convertible arbitrage, a trading strategy that relies on borrowed money, have been dumping their convertible debt in order to reduce leverage.

``Things have gotten cheaper, cheaper, cheaper,'' in the convertible market, Butman said. That may be an attraction for Hawkins, a buy-and-hold investor who seeks to invest in companies when they trade at 60 percent or less of Southeastern's appraised value of their business.

Too Much GM Talk

Hawkins, the 60-year-old founder and chairman of Southeastern, voiced support for GM as recently as last month, saying in a shareholders report for his firm's $10.7 billion Longleaf Partners Fund that the automaker is ``deeply discounted versus any conservative estimate of its worth and earnings power.''

The investment has been controversial among Southeastern clients. G. Staley Cates, the firm's president, said at its annual investors meeting in May that he and Hawkins have had to talk about GM ``way too many times for me, frankly.''

Southeastern began buying GM common stock during the third quarter of 1999, when the shares traded at an average closing price of about $64.84 each. In a Longleaf Partners shareholder report for that quarter, Hawkins said that he viewed GM as more of a high-quality conglomerate than an auto company, adding that its ``jewel'' was Hughes Electronics Corp., a subsidiary whose assets included the DirecTV satellite-television business.

Range of Loss

As of June 30, Southeastern held a 7.9 percent stake in GM consisting of 44.7 million common shares, including 14.2 million shares owned by Longleaf Partners. The timing of yesterday's filings with the U.S. Securities and Exchange Commission suggest that Southeastern sold most if not all of its GM stake last month, when the average closing price for the common shares was $10.42 each.

Based on the highest and lowest GM share prices during each quarter that Southeastern traded the automaker's stock, the firm's loss on its recent sale would range between $1 billion and $1.9 billion, according to filings and Bloomberg data.

This figure wouldn't account for any gains that Southeastern had on businesses previously spun off by GM, such as Hughes Electronics.

The Series B senior debentures that Southeastern now holds pay interest at an annual rate of 5.25 percent and mature in March 2032. With the debentures trading at a 52 percent discount to face value, the yield on the bonds equals about 11.8 percent. In contrast, GM announced in July that the company would suspend its common-stock dividend, as well as sell assets and cut its management payroll, in a bid to raise at least $15 billion over the ensuing 18 months.

``It's a chance for Southeastern to still get some income after GM cut their dividend,'' David Healy, an analyst working from Sierra Vista, Arizona, for Burnham Securities Inc. of New York, said of the investment in convertible bonds. GM's Series B debentures are convertible at $64.90 a share, more than five times the current stock price.

GM shares were up $1.33, or 11.6 percent, to $12.75 at 4:15 p.m. in composite trading on the New York Stock Exchange.

To contact the reporters on this story: Miles Weiss in Washington at mweiss@bloomberg.net; Greg Bensinger in New York at gbensinger1@bloomberg.net

Last Updated: September 11, 2008 16:24 EDT