Ford May Lose Potential Funding Source As Kerkorian Exits

CNN Money -October 21, 2008: 02:21 PM EST

DETROIT -(Dow Jones)- Billionaire Kirk Kerkorian's decision to begin dumping his Ford Motor Co. (F) shares may leave the auto maker without a funding source, as losses mount and a global automotive slowdown extends into 2009.

Kerkorian's Tracinda Corp. announced Tuesday that it sold 7.3 million shares of Ford common stock Monday and may sell all of its remaining 133.5 million shares - about 6.09% of the shares outstanding - depending upon market conditions and available sales prices.

The move comes just months after Kerkorian, who has a long history of investing in Detroit auto makers, started building his stake in Ford, expressing confidence in the company's management team and pledging to possibly inject additional capital to aid Ford's turnaround efforts.

"Ford is losing one of its last-resort strategies - the ability to tap Kerkorian's deep pockets to help with any future liquidity crises," said Global Insight analyst Aaron Bragman. Were Ford's liquidity position to fall to dangerously low levels, Kerkorian might have been able to offer up a few billion dollars to buy the company time, Bragman noted.

News of Kerkorian's exit, an indication he lost confidence in the company's ability to recover, helped push Ford shares down 7.7% to $2.15 in recent trading. The stock had moved as low as $1.88 two weeks ago on heightened concern that Ford and its Detroit rivals could face liquidity pressure due to a deteriorating economic scenario and tightening credit conditions.

"Mr. Kerkorian must have realized that trying to turn Ford around in the midst of an economic downturn is going to require more energy and attention than it's worth," said Gimme Credit analyst Shelly Lombard. "It's easier to bet on something like gaming which is down due to the economy but doesn't require operating changes."

Tracinda said in a statement that "in light of current economic and market conditions, it sees unique value in the gaming and hospitality and oil and gas industries and has, therefore, decided to reallocate its resources and to focus on those industries."

Pressure On Liquidity In 2009

Ford, which has been restructuring for three years through deep cost cuts and a renewed focus on small vehicles, announced in May it was abandoning its long- standing goal of returning to profit in 2009. The company, which recorded a net loss of $8.7 billion in the second quarter, has yet to set a new goal.

Ford spokesman Mark Truby on Tuesday declined to comment specifically on the news about Kerkorian. "We remain confident and focused on our plan to transform Ford into a profitably growing auto maker," he said.

An important component of the restructuring was a move in late 2006 by Chief Executive Alan Mulally, who had just recently joined the company, to borrow $ 23.4 billion using most of its assets, including the blue oval logo, as collateral.

That borrowing served Ford well during the deep downturn that followed, but the company appears increasingly vulnerable given the prospect of accelerating cash burn in the coming months. Ford's cash position stood at $26.6 billion at the end of the second quarter.

Mulally said in an interview earlier this month that the auto maker has enough liquidity, and bankruptcy "absolutely makes no sense." Ford also reportedly turned down merger talk with General Motors Corp. (GM).

Nonetheless, credit rating agencies have warned that Ford's liquidity could be threatened in 2009 because of deteriorating fundamentals. Earlier this month, Fitch Ratings cut its credit rating on Ford deeper into highly speculative territory, while Standard & Poor's Ratings Service threatened to do likewise.

Fitch analyst Mark Oline said Tuesday Ford could have mixed Kerkorian's potential funding with other sources if it needed to raise money. Now, Ford's best bets may come down to the federal government or asking the United Auto Workers to change the provisions of its retiree health-care fund and cut wages.

"This really is a vote of no confidence in Ford," Oline said. "If he thought his investment was valid, he could have easily increased his stake."

S&P analyst Gregg Lemos Stein said that the rating agency doesn't feel that Kerkorian's decision to sell shares has an impact on Ford's liquidity.

"When Kerkorian first made the Ford investment this summer, we said it was a non-factor in terms of the company's creditworthiness and liquidity, and we feel the same about his exit," Lemos Stein said. "We had never counted on any kind of significant secondary offering to Kerkorian."