NEW YORK (CNNfn) - General Motors Corp. announced Tuesday that it planned to hang on to its Hughes Electronics division, rather than sell or spin it off, as many analysts expected.|
The world's largest automaker will cut its holdings of the tracking stock for Hughes (GMH: Research, Estimates) from 70 percent to about 35 percent, by putting some $7 billion of the stock in GM benefit plans and by allowing GM shareholders to exchange their shares for about $8 billion of Hughes tracking stock in a tax-free transaction.
Still, even with the move, GM will continue to own 100 percent of Hughes' assets; thus, Hughes will remain a GM subsidiary.
Doing so means the company will retain its commitment to El Segundo, Calif.-based Hughes, which makes communications satellites and provides satellite-based services such as the technology behind GM's Onstar system, which is increasingly showing up in cars. Hughes owns and operates one of the world's largest private fleets of geo-stationary communications satellites; it also operates the DirecTV satellite television service.
For investors, the deal amounts to a buyback of GM stock, granting shareholders more of a stake in the company's burgeoning satellite information services, such as the Onstar, which provides motorist onboard directions among other features.
"They're using part of their Hughes stake to retire GM's shares outstanding. So in this regard it's what essentially amounts to a buyback of approximately 16 percent of the GM common stock outstanding," said David M. Garrity, an analyst with Dresdner Kleinwort Bensen. "Certainly by making more GM class H stock helps improve the liquidity and its valuation for GM-Hughes shares."
Rod Lache, an analyst with Deutsche Banc, said the move brings out the hidden value of GM's stock for shareholders. Just $32 of the company's $85 a share price accounts for its auto manufacturing business. Hughes makes up the bulk of the stock's value.
"It's undervalued. There's a hidden asset, and GM's realizing some of that value for shareholders. They're going to use some of this stock to buy back some GM," Lache said.
He also said the stock's closing price neared a 10-year record high.
GM executives acknowledged that the company planned to pump up its offerings of digital entertainment and business communications
"It is important to retain our strategic relationship with Hughes," Jack Smith, GM's chief executive said in a statement. "We continue to create new communications capabilities and functionality in our vehicles. Hughes has redefined itself as a premier provider of digital entertainment and business communications, which strengthens its ability to contribute to GM's strategy to grow its service-oriented businesses."
The decision came after a meeting of the board of GM (GM: Research, Estimates) Tuesday morning. The company's statement shut the door on the sale or spinoff that many were looking for out of the meeting.
"GM has no current plans or intention to separate Hughes or any of its businesses from GM, whether by means of a spinoff, split-off or any other transaction," the company said in the statement. "However, GM will continue to evaluate what Hughes ownership structure would be optimal for the two companies and GM stockholders."
Trading in both GM shares and Hughes equities was halted for a brief period prior to the announcement, made in mid-afternoon. Just before the close of trading in New York, shares of GM closed up 4-11/16, or 6 percent, to 85-1/4. Hughes shares closed up 2, or 2 percent, to 114-1/2.