Judging from all the hoopla, one would expect General Motors Corp. to have divested itself of Hughes Electronics Corp.by now. After all, the subsidiary, which consists mainly of the satellite television business known as DirecTV Inc., was recently valued at $40 billion by analysts, compared with $28 billion for GM. If GM doesn’t act soon, it could find itself subject to a hostile takeover by a bidder primarily interested in Hughes. In fact, its attractions drew the interest of corporate raider Carl Icahn, who took a big stake in GM last August, only to sell it a month later, evidently because he was unable to force faster action.
Yet a host of companies, including Comcast, Disney, General Electric, News Corp., Sony, Viacom, and Vivendi, were all considered possible partners for Hughes, at least until recently. One of the most eager, reportedly, is News Corp., which has a satellite TV business of its own called Sky Global Networks Inc., in which Microsoft Corp. is said to be interested in investing. While Sky Global has no tracking stock that could serve as currency for such an acquisition, John Malone of Liberty Media Group, a large investor in News Corp., recently directed his company to contribute assets to News Corp., which could help the latter do the deal.
So what’s holding things up? The basic problem is that GM carries Hughes on its books for only $5 billion, so divesting it would create a huge tax liability for its shareholders–a problem heightened by GM’s use of tracking stock in connection with Hughes. That’s because the interests of tracking-stock holders conflict to some degree with those of GM shareholders. Meanwhile, the stocks of both companies are heading south, even as some potential Hughes buyers appear to be getting cold feet. So, the longer GM takes to resolve the conflict, the more difficult it may be to extract maximum value for Hughes. “GM is between a rock and a hard place,” says Jeffrey Wlodarczak, an analyst at CIBC World Markets Corp. GM’s dilemma suggests that companies may want to think twice about trying to unlock the value of coveted assets through tracking stocks.
To be sure, the potential tax liability involved in the Hughes divestiture is substantial enough to present formidable problems, regardless of the issues posed by the tracking stock and declining share prices. About the only way around the tax issue, say analysts, is through a variation on a byzantine but widely used scheme known as a Morris Trust transaction. Named after a bank that was the defendant in a 1966 tax case, the scheme, in effect, blurs the line between a tax-free corporate restructuring — a spin-off or merger — and a taxable divestiture of a business.
However, “Morris Trusts are very complex,” says Daniel Van Riper, CFO of Sealed Air Corp. “You really need competent corporate counsel to pull it off.” Van Riper notes that his company announced a deal based on a reverse Morris Trust — which involves debt — in August 1997. But the deal, which merged the old Sealed Air with W.R. Grace & Co.’s Cryovac food packaging business, was not consummated until March 1998, even though the reverse Morris Trust structure was fully anticipated at the time of the announcement.