This is a hot reading season. No, I'm not talking about beach books and awaiting the upcoming Harry Potter. I'm talking about the stuff that number crunchers like me read. Hot off the presses: documents about Hertz, the big car-rental company that's being put up for sale by its owner, Ford Motor.
You don't often see one household name selling another one. Even more interesting, Ford has fallen on hard times and has pension fund problems. So I looked forward to reading the fat filing Hertz made with the Securities and Exchange Commission explaining what's going on. But guess what? Nowhere in its 175 pages -- which include a dozen pages of "risk factors" -- does Hertz raise the possibility of what I learned last week. To wit, that the Pension Benefit Guaranty Corp., the federal agency that insures pensions, is looking at the transaction and says it may try to get Ford to use its Hertz windfall to strengthen its pension funds.
Before our lawyers get apoplexy, let me hasten to say that I'm not accusing anyone of breaking the law. The problem is that companies can satisfy legal requirements without telling investors some things they ought to know.
The question of Hertz's responsibility for Ford's pension shortfalls really matters, because a Hertz with a "contingent liability" for Ford's problems would be valued lower in the stock market than a totally clean company. And no big corporate buyer is likely to want a Hertz burdened with a possible Ford pension problem, because that problem could infect the buyer. That happened to Carl Icahn when he bought TWA in the 1980s.
Hertz explains straightforwardly in its filing that because it is part of Ford's "controlled group" of companies, it and Ford are currently on the hook for shortfalls in each other's pension funds. Would Hertz, whose own pension shortfall is a trivial $69 million, continue to be on the hook for Ford's huge pension shortfall when it leaves Ford's controlled group? The documents don't say. Neither will Ford, which said it's in a "quiet period" because the Hertz offering is pending at the SEC.
Hertz is a big deal to Ford, even though it's less than a twentieth Ford's size. Ford's stock market value was under $19 billion as of Friday. But Hertz's market value could be as much as $6 billion, according to Paul Bard, an analyst with Renaissance Capital, a research firm specializing in initial public offerings.
According to Ford's SEC filings, its pension fund shortfalls totaled $3.5 billion at year-end 2004, using generally accepted accounting principles. But by PBGC standards, the shortfalls are much larger: possibly more than $10 billion. GAAP figures, generally optimistic, assume a pension fund will stay in business indefinitely. The PBGC figure assumes the fund is terminated today. My $10 billion estimate is based on what I know of PBGC math. (Ford won't disclose its PBGC number, and the PBGC is legally barred from doing so, absent a court case or a congressional request.) The PBGC has legal and moral power to stop companies with pension shortfalls from disposing of significant assets unless their pension funds are protected in the process. In 1994, for instance, it made a deal with General Motors to contribute to its pension funds proceeds from selling EDS. Two years ago GM put in $5 billion raised by selling its Hughes subsidiary.
Ford spokesman Glenn Ray told me that Ford is so serious about meeting its pension obligations that it has put $1.3 billion into its plans this year even though it wasn't legally required to put in anything. A logical solution: Let Ford turn its Hertz holdings into money and put some (or all) of the proceeds into its pension funds. Everyone's honor is satisfied, Ford frees its operating cash for nonpension uses and the PBGC can bless it all.
It's quite Harry Potter-esque: It's simple and magical and makes problems go away. And you don't have to crunch a single number.
Add It Up: $1.58 billion. That's how much Morgan Stanley must pay financier Ronald Perelman after a judge tacked on interest payments to the initial damage award of $1.45 billion. Perelman claimed he was defrauded by Morgan when it approached him in 1998 to sell his Coleman sporting goods company to Sunbeam, which later collapsed. Stay tuned for the appeal.
Sloan is Newsweek's Wall Street editor. His e-mail address is firstname.lastname@example.org.