Hughes: Free At Last?

GM may be ready to spin off its fast-growing satellite unit

Shareholders of General Motors Corp. have for some time harbored a not-so-secret wish: They covet the value that they figure can be theirs if the auto giant spins off Hughes Electronics Corp., the world's top satellite outfit. For just as long, GM has resisted.

But now, it looks like shareholders may get their wish. Since Labor Day, Hughes's managers, including Chairman and Chief Executive Michael T. Smith, have been dropping hints that the car company run by his brother, Jack, might spin off most of its 69% stake in Hughes over the next six to 18 months. That prompted GM Vice-Chairman Harry J. Pearce on Oct. 6 to issue a carefully worded statement assuring analysts that GM wasn't ruling out a Hughes spin-off, but wasn't planning one now.

IN THE TIMING. Before GM can consider a Hughes spin-off, Pearce said, Hughes must clarify its own strategy. Hughes execs will get their chance to do so on Dec. 6, when they make their annual presentation to GM's board. "The separation of Hughes from GM is a matter of when, not if," says John A. Casesa, an auto analyst at Merrill Lynch & Co.

Shareholders began to lobby hard for a spin-off last spring when GM unveiled plans to pump $500 million into Hughes for expansion. "They got out their pens and started writing to management and directors," says J.P. Morgan analyst David Bradley. GM withdrew the plan after America Online Inc. agreed to kick in a $1.5 billion strategic investment. But by then, investors were pressing GM to cut the apron strings altogether.

A spin-off would unlock tremendous value at Hughes. As a tracking stock, GM's H shares have not commanded the same valuation as pure plays in the satellite business. More important, independence from GM could pave the way for Hughes to be more aggressive in developing its DirecTV unit. It might even do its own spin-off of DirecTV shares to generate more value and capital. GM, meanwhile, could use the approximately $18 billion its Hughes stake would fetch to help meet unfunded health-care obligations that total $41 billion.

How would the deal add up? Casesa figures that Hughes accounts for $29 of GM's current $66 share price. That would leave GM worth about $37 a share without Hughes. Because Hughes earnings account for just 2% of GM profits, the effect on GM's price-earnings ratio would be quite lopsided: At 37, GM shares would trade at a puny 4.5 times expected 1999 earnings, compared with Ford Motor Co.'s multiple of 9. And while most analysts believe GM isn't as well run as Ford, they say the auto giant's stock ought to rise to a multiple of 7 or 8 times earnings.

And if it didn't? With a slimmer market capitalization of about $24 billion, GM "would be a takeover target, and that would be fabulous," says GM investor Seth M. Glickenhaus of Glickenhaus & Co.

GM is still coy about when and how it might spin off Hughes. One scenario: The company might hold on to a third of its Hughes stake, while contributing a third to health-care liabilities and the remainder to owners of GM common. That way, GM could retain a piece of Hughes's future earnings and keep a pipeline to Hughes technology that could enhance GM cars. But Wall Streeters would regard such a strategy as an interim measure. Before too long, investors would be clamoring for the rest of Hughes. And GM execs would have one last bone to toss out to placate their perennially restless stockholders.