GM's Hughes becomes technology prize

News washed over Wall Street yesterday that Rupert Murdoch's News Corp. and AT&T's Liberty Media may want to buy General Motors, the largest auto manufacturer in the world. But it's not the cars the media companies want--GM also owns Hughes Electronics, the parent of satellite TV leader DirecTV and the DirecPC high-speed Internet service.

Investors have long been pushing the auto company to sell or spin off its high-tech division into an independent company. But the giant has consistently balked, saying that it sees "synergies" between the auto business and the telecommunications division.

That's infuriated stockholders, who see Hughes as a gold mine being held back by its association with the auto company.

"Investors are anxious for GM to recognize the value of that asset. There has been pressure applied," said Travis Pascavis, an analyst for Morningstar, a mutual fund information service. "But GM has not been willing to give up control."

The interest swirling around GM's satellite division is just one part of the rash of consolidation and investment now sweeping through the high-speed Internet industry. Telephone and cable companies have spent billions buying each other over the last two years. America Online took a $1.5 billion stake in Hughes last year, aiming at creating a tight relationship between the satellite company and its own Internet services.

Hughes' DirecTV service is the No. 1 direct broadcast satellite (DBS) television service with more than 8.2 million subscribers, outpacing rival Echostar's Dish Network. The satellite TV industry in general has furiously added subscribers in recent years, cutting into cable operators' market share by offering competitive prices, strong customer service and in many cases more channels, digital music and easy-to-use electronic program guides.

GM still owns close to 100 percent of Hughes. It has allowed the division a bit of market freedom by creating a separate tracking stock for the satellite division. But that's not enough for investors. Hughes is a separate company, they say, and it should be let go.

"Hughes operates pretty free of GM," said Saul Rubin, a financial analyst with Warburg Dillon Read. "That's one of the reasons that investors want it to be (literally) free of GM."

Analysts say the automaker has held on to the satellite division partly in order to help add high-tech services such as Internet access and other computerized functions to its cars. Some say the company also has hoped to prop up its own stock price by having a technology component to its business.

That reluctance to let go has spawned months of rumors that somebody might be interested in buying GM outright, simply to get to the attractive Hughes assets. Nobody has made any tangible bids, however.

Yesterday a report broke on financial news station CNBC that Murdoch's News Corp. and possibly AT&T's Liberty Media were talking with bankers, looking for a way to buy GM, keep Hughes, and sell off the auto assets. Reports said that a deal was complicated and unlikely. But Hughes' tracking stock went up 13 percent anyway, and the GM umbrella stock went up more than 6 percent.

News Corp. and AT&T would be interested in using the valuable Hughes satellite assets as a way to offer television and high-speed Internet services, the reports said.

The companies acted quickly to quash the story.

"Today's report that News Corporation has engaged in talks with General Motors, investment bankers and other third parties regarding a potential acquisition of General Motors is entirely false and without merit," Murdoch's company said in a statement.

General Motors denied comment.

But analysts said such a deal, while it would be difficult to complete, fit with the general perception that Hughes had to be separated from the auto business, and that there are suitors in the market that might pursue an expensive surgical operation to do so.

"It's unlikely, but it's plausible," Rubin said. "There's a compelling logic to this happening."

While no official bid has been offered for GM--viewed until recently as immune to takeover because of its high value--and no organized stockholder campaign has tried to pry loose the Hughes assets, analysts say the market has mounted its own kind of punishment.

Analysts note that GM's total stock is worth about $54 billion. The tracking stock that covers the Hughes portion of the company is valued at $19 billion. The company has about $13 billion in cash and securities. That leaves just $22 billion in valuation for the auto manufacturing portion of the business, almost an insulting figure for a company with one of the highest revenue streams in the world.

Nevertheless, most analysts say any immediate deal is highly unlikely, and point to recent GM moves to put more Hughes stock on the market as evidence that it might be considering spinning off the satellite company at last.

Also, any deal with a media company would be complicated by the strong relationship AOL and Hughes have built over the last year, following the ISP's $1.5 billion investment in Hughes. That relationship, cemented last June, is still in its early stages, according to DirecTV spokeswoman Gina Magee.

Magee said the two companies are working on a combined set-top box, which will allow consumers to receive the satellite television signals and AOL's interactive services through the same system. They also are working on a joint marketing campaign for the new service, which will draw much of the $900 million of the AOL investment targeted for the DirecTV division. The rest of the investment is slated to go to the other divisions, including the branch of Hughes that handles the DirecPC high-speed satellite Internet division.

But if a company such as News Corp. were able to mount a strong takeover challenge to the auto giant, GM might finally back away from its reluctance to sell its satellite division, analysts said.

"If you can mount a credible takeover challenge to GM as a whole company, I think they'd sell off Hughes," said Steve Blum, a satellite industry analyst and president of Tellus Ventures, a satellite consulting firm.