Kerkorian blesses merger, sees Chrysler investment triple

Geraldine Fabrikant

Thursday, May 7, 1998 | 10:43 a.m.

Kirk Kerkorian is known as a reclusive billionaire who does not talk much to investors or the press. But if he did, he would certainly be entitled to say, "I told you so."

His much maligned 1990 investment in Chrysler Corp. is proving nothing short of brilliant. If the merger is consummated between Chrysler and German automaker Daimler-Benz AG, Kerkorian's remaining stake of 89.2 million shares would be worth nearly $5 billion, more than triple his original investment.

Kerkorian's Las Vegas-based Tracinda Corp. today issued a statement in support of the merger.

"As Chrysler's largest shareholder, Tracinda supports Chrysler's bold initiative to build on its strong domestic position and stay ahead of the curve in an industry poised for global consolidation," Tracinda said.

"We believe the combination of Chrysler and Daimler-Benz can create substantial shareholder value by establishing a truly global automotive company with huge economies of scale. Together, Chrysler and Daimler-Benz will have substantial synergies, broad geographic reach, and increased product diversification that over time can be leveraged into an even stronger competitive position than they will enjoy initially."

Kerkorian began buying the stock eight years ago, when the company was still recovering from years of poor sales. Over the years, he purchased 100 million shares, for a total of $1.4 billion, making half of that investment just two years ago.

The investment, which was met with contempt on Wall Street and hostility at Chrysler because of his reputation as a corporate raider, had paid off even before the talks between the car companies were disclosed Wednesday.

The news of a possible merger sent Chrysler's stock soaring, to close at $48.8125, up $7.375 a share. Kerkorian, who turned a huge profit when he sold his stake in MGM/UA Communications a decade ago, paid an average of $14 a share for his Chrysler holdings.

In the wake of a 1996 standstill agreement with Chrysler's management, Kerkorian agreed not to acquire more than 13.75 percent of the company. In the ensuing two years, as the company bought back stock, Kerkorian sold back 11 million shares, for a total of $370 million, to comply with the percentage limit. And he has also received $500 million in dividends. Those payments, together with the value of his current holdings if the deal goes through, would total nearly $5.9 billion, or more than four times his investment.

Aside from Kerkorian, Chrysler's largest shareholders are Capital Research and Management, with 5.85 percent of the stock as of last December, and State Street Bank and Trust, with a 2.97 percent stake.

Kerkorian has long been a thorn in the side of Chrysler's management, threatening a takeover in 1995 after teaming up with Lee Iacocca, the company's former chairman. But two people close to Kerkorian said Wednesday that he did not know about the current merger talks until January, when they were already well under way.

Still, the deal, if it comes to pass, would be a remarkable coup for the 81-year-old Kerkorian. At Wednesday's closing price, his holdings are worth $4.3 billion. But if, as expected, the deal takes the form of a tax-free stock exchange, Chrysler shareholders would get about $56 in Daimler stock for each of their shares. In that event, Kerkorian's stake would be worth nearly $5 billion.

Regardless of the form of the transaction, Kerkorian's cost basis remains the same for his shares -- in some cases as low as $6. That means if he sells the stock, he would have to pay a hefty capital gains tax.

Many older wealthy people are reluctant to sell stock that has gone up greatly in value since securities that are still in their estates when they die escape capital gains on their profit. That is because the cost basis of the stock is deemed to be the trading price at the time of the owner's death. The owner's heirs must pay capital gains tax only on increases in value after that time.

Though it might be prudent for Kerkorian to hold on, it would not reflect his investment history. Sooner or later, he prefers to cash out. In 1986, for example, he sold MGM/UA Communications to the Turner Broadcasting System for $1.5 billion, primarily for cash. He then bought back all the assets, except the film library, and resold them to Giancarlo Parretti's Pathe Communications for $1.3 billion.

Kerkorian still controls Las Vegas-based MGM Grand Inc. in Las Vegas, and shows little sign of slowing down. Indeed, Kerkorian, who has two grown children, became a father again just a month ago, his spokesman confirmed Wednesday.