In buying 5.6% of Ford, is the wily casino mogul looking for a cheap stock play or does he have bigger plans for the automaker?
First he made a play to force Renault-Nissan and General Motors into a shotgun wedding in 2006. Then he made a bid to buy Chrysler from Daimler (DAI) last year. Now, wily billionaire Kirk Kerkorian's Tracinda is making a tender offer to boost its stake in Ford Motor (F).
Early Monday he made a bid at $8.50 apiece for 20 million shares in a play that would boost his stake from 4.7% of Ford's common stock to 5.6%. What does the casino mogul see in Detroit's rusty, beleaguered carmakers? Cheap stock, for starters.
Ford and GM stocks have both been trading at historic lows recently. GM (GM) nearly hit $17 a share this year and Ford's share price sunk beneath $5 a share. "It's a cheap stock, and the company has been spinning off some good news lately," says David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich. "They also realize that the softness in the economy won't last forever."
Signs of Strength
Kerkorian's motivation could be the simplest. He can buy a slug of Ford stock at less than $7 a share. His number-cruncher and resident auto industry expert Jerome York seems to think Ford CEO Alan Mulally has the company on the right track and it will reap a hefty return in a couple of years when the economy is stronger and the four-year union contract inked last fall starts to deliver deeper cost savings. Kerkorian may believe Ford is near its bottom.
Ford has shown some good signs lately. Its $100 million first-quarter profit (BusinessWeek.com, 4/24/08) was a surprise. Ford has also shown quality improvements that the company is aggressively using in its marketing efforts. It also has nearly $29 billion in cash to weather the current economic downturn. That's more cash than larger rival GM.
A Possible Arranged Marriage
Maybe York, Kerkorian's deputy, sees a value play. But there are some more brazen possibilities. Even if Kerkorian thinks Ford is headed in the right direction, he could still buy more shares and agitate for a board seat. Then he can sit on Mulally's shoulder to make sure the former Boeing (BA) man keeps America's No. 2 automaker on the right track.
York has made favorable comments about Ford recently. He hinted during a speech at the CFO Rising conference in March at DisneyWorld that Ford is in better shape to weather a recession than GM.
Of course, Tracinda did say it initially bought into GM more than two years ago as a passive investor. Eventually, Kerkorian put York on the board and pressured the company to forge an alliance with Renault-Nissan (NSANY).
Perhaps York and Kerkorian see even greater value in linking Ford and Renault-Nissan. Carlos Ghosn, who is CEO of both companies, has said he would like a third leg to his alliance. He has made no bones about his intent to link up with one in North America. Plus, Kerkorian, York, and Ghosn all know each other, having met to talk about a link with GM.
The Ford Family Retains Control
All of those are possibilities. But at this point, it does look like a passive investment. Even if Kerkorian wanted to make a more aggressive play for more control at Ford, gaining voting power isn't so easy. The Ford family's special class B shares keep 40% of voting power in their hands. Since family members also own some common class A shares, they effectively control the company. Kerkorian would have a tougher time exerting pressure if he and the family were at odds.
That said, the family has seen the value of Ford diminish massively in recent years. The company's shares are worth $18.2 billion today since Ford surprised investors with a $100 million profit for the first quarter last week. Kerkorian's announcement today has pushed the stock up to 10%. But as recently as March, Ford's total value dropped as low as $10.6 billion.
Since Ford's value has sunk so low and there is no longer a stable dividend stream, "we think the family's desire to maintain voting control at all cost is now considerably lower," JPMorgan (JPM) analyst Himanshu Patel said in a research note.
Ford has only said that they welcome Kerkorian's investment in the company. And for the moment, it's a passive deal. Since his initial buy of 100 million shares in early April until now, Kerkorian's investment has already grown in value by more than $100 million. So long as Ford keeps showing signs of progress, Kerkorian's investment will be a friendly one.