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Hughes Sale a Break, but No Bonanza for GM

Most of the proceeds will be used to plug its pension and health care gaps.

General Motors'

(GM) - Get Report

sale of

Hughes Electronics

(GMH)

to

News Corp.

(NWS) - Get Report

is a positive for the troubled automaker's finances, but it won't solve the liability hurdles the company faces, experts say.

With around $76 billion in pension and health care obligations, GM is expected to channel most of the cash from the sale of Hughes to that gap, leaving little for investment.

"This is a step in the right direction," said Dave Healy, an analyst at Burnham Securities. "But it doesn't solve the underfunding problem."

"It's definitely a positive move, since the unloading of Hughes means what has been a major distraction for management for years is now gone," said Brian Lund, an auto analyst at Morningstar. "But shareholders won't get to see this money because of the company's obligations to retirees."

News Corp. is acquiring 34% of Hughes, parent of satellite TV broadcaster DirecTV, for about $6.6 billion in cash and stock. GM is expected to get roughly $3.1 billion of the price in cash, and could sell the stock portion to raise additional money.

Additionally, GM will receive a $275 million cash dividend from Hughes when the transaction is complete, according to GM spokesman Jerry Dubrowski.

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Most analysts expect shareholders to indirectly benefit from the deal -- with an improvement in earnings by early 2004 -- mainly related to the fact that money-losing Hughes will no longer weigh down GM's overall earnings. Healy, for instance, expects earnings per share to improve by 20 cents by the end of the year. GM is expected to profit $6.64 in 2002, according to Thomson Financial/First Call.

The $76 billion in liabilities was one of the reasons Standard & Poor's changed the outlook on GM's debt rating to negative from stable this week. The rating agency said the company's $25 billion in unfunded pension liabilities and the $51.4 billion in medical obligations "still pose significant concerns."

Although these liabilities aren't immediately due, they must be slowly paid down each year, and therefore represent a drain on GM's future cash flow.

Vastly underfunded liabilities are not exclusive to GM.

Ford

(F) - Get Report

and

DaimlerChrysler

(DCX)

, to a lesser extent, face similar issues. Most of them are related to the downturn in the stock market, where the bulk of the pension funds are parked. If stock markets were to rebound, a big weight would be lifted off these companies' shoulders. But while waiting for that, automakers are struggling with grim profits on car sales, which doesn't bode well for their obligations.

Compared to Ford, GM isn't in particularly bad shape. Analysts highlight the company's ability to bring new products to market, as opposed to Ford's dearth of new models and scary debt load.

So the Hughes deal, while not a boon, isn't irrelevant to GM. The company will generate much-needed cash and help it at least begin to face its mounting problem with pensions and health care funding. According to Burnham's Healy, the buyout takes care of one-fourth of the company's liabilities this year, "but does not cure the whole illness."

And analysts don't think GM faces a liquidity problem right now. "Automakers have much cash at hand now and GM's balance sheet is in a fine position for now," said Lund. "This will help them defer payments longer into the future, but I'm not sure it solves their long-term troubles."

Michael Schroeder, CEO at Wasmer, Schroeder & Co., an investment management firm, agrees the deal is a plus. He says the Hughes sale ejects a money-losing asset and will help GM management focus on its core business.

"If you're in the car business, you should make cars," he said.