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After the Bailout, Kerkorian Bails Out

By Rich Smith – Updated Apr 5, 2017 at 7:51PM

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A Fool parses the economics of homonyms.

Timing, as the say, is everything. So what does it tell us when one of the world's fabled investors dumps his entire stake in Ford (NYSE:F) just days after the U.S. Congress approved a $17.4 billion bailout for the automotive industry?

Read the fine print
First and foremost, it tells us to read the news carefully. Yes, Kirk Kerkorian's Tracinda confirmed yesterday that it no longer owns Ford shares. But no, we do not know precisely when those shares were sold -- and in all likelihood, they were sold long before the bailout ultimately passed.

What we know for certain is that Kerkorian:

  • Started investing in Ford last spring, inspired in part by the hire of Boeing (NYSE:BA) vet Alan Mulally as Ford's new CEO.
  • Spent nearly $1 billion to acquire 141 million shares of Ford at an average cost of $7.07 per share.
  • Began liquidating his position in mid-late October, unloading 34 million shares at an average of $2.01 per share, adding up to a loss of roughly $172 million.
  • Still owned 107 million shares -- almost 5% of the company -- as of Oct. 28.

Why the rush?
After waiting so long to cash his chips, why couldn't Kerkorian hold out a little longer to try and break even on his bet? Perhaps he could, but the odds of Ford going bankrupt or accepting a government bailout that could wipe out common stockholders a la Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) are growing.

Further, Kerkorian's 5% stake in Ford is not his only investment. Included in his holdings are a 50% stake in MGM Mirage (NYSE:MGM), which has dropped 85%, and a 38% position in Delta Petroleum (NASDAQ:DPTR) which is down 75%. That's some depressing performance for companies of which he holds such large positions.

Rather than sit around and keep waiting for the turnaround from Mulally that will likely never come, I'd say he's better off just dumping the investment that has little future potential, which at this point is Ford, and reallocating his capital to companies with better prospects. Kerkorian may be taking a steep loss on the investment, but Ford's future is murky, even if it does survive without a bailout.

Meanwhile, MGM is struggling through the recession, and with prices so cheap right now (it's selling at just 9.7 times this year's expected earnings), I'd say using the cash from the Ford liquidation to invest in MGM's much more optimistic future would be a far more prudent decision for Tracinda.

Read more about this master (of disaster?) investor's recent investments in:

Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool's disclosure policy wants a Chevy Volt for Christmas next year -- oh, and its two front teeth, too. And a Barbie doll. And a Dora the Explorer lunchbox.

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