What Next for Hughes? : Fullerton Complex With 2,400 Workers Still on the Block

In its plan to sell Hughes Electronics Corp.’s defense operations, owner General Motors Corp. has made it clear that it sees little strategic reason to be a major Pentagon contractor.

But the sale raises far-reaching questions about what the world’s No. 1 auto maker intends to do with the remainder of the Los Angeles-based aerospace giant.

The sale by GM, which is expected to be won by Raytheon as early as today, will not include the highly successful commercial satellite manufacturing unit in El Segundo and its DirecTV unit. Hughes has dominated the world of commercial satellites since the dawn of the Space Age and remains a major force in the world of secret military satellites.

GM’s sale will also exclude Delco Electronics, one of the world’s largest manufacturers of automobile electronic systems, which is held by the Hughes Electronics unit.

GM will continue to operate the Delco and Hughes space units, but the firm is being characteristically tight-lipped about its plans for the companies.

Hughes, however, has informed Fullerton officials that its 350-acre defense complex there will remain on the block, an indication that its days are numbered, regardless of who buys Hughes’ defense operations.

Hughes has 2,900 employees in Orange County: 2,400 at its Fullerton plant, 440 at its microelectronics division headquarters and plant in Newport Beach and 60 at its data systems division headquarters in Irvine. All three facilities are on the market as part of Hughes’ plan to shed its defense operations.

The Fullerton campus, which opened in 1959, had as many as 15,000 employees during the defense industry’s heyday in the Southland. Hughes put the complex up for sale early last year when the company shut down most of its Fullerton operations as part of a corporate consolidation. The company laid off about 800 workers in Fullerton and transferred nearly 4,000 more to other locations.

After selling Hughes’ defense operations, however, GM almost certainly will reorganize its ownership of the remaining units. The two firms are currently traded under GM’s Class H stock, but the equity in the two firms is held entirely by GM.

The consensus among industry observers and analysts is that Hughes will remain a top-notch satellite and communications firm, undergoing breakneck growth. Meanwhile, Delco will be merged with GM’s parts subsidiary, Delphi Automotive Systems.

The new Hughes will be poised to take advantage of growing consumer demand for entertainment and Internet services and could grow into a $10-billion company by 2000 if it is separated from GM, its parent of almost a dozen years.

Hughes Chairman and Chief Executive C. Michael Armstrong’s reported decision to stay with the telecommunications part of the business is a sign of insiders’ bullish feelings about the company, say analysts, some of whom are salivating for a Hughes initial public offering.

“That’s the part of the company I want,” said Jeffrey Pittsburg, a partner with Goldis-Pittsburg Institutional Services in Garden City, N.Y. “No question, that part of the business shows great promise, not just here but worldwide. That’s where the real growth is.”

Like other U.S. auto makers, GM diversified heavily in the mid-1980s when auto sales were booming and Detroit was flush with cash. GM, Ford and Chrysler all invested in aerospace, car rental and finance companies, arguing that these businesses would see them through the inevitable downturns in the auto business.

While Hughes turned out to be a good investment, it didn’t do much to make GM a better car company. Like other auto makers with similar experiences, GM began to shed its sideline businesses in the early 1990s. Hughes’ defense business, which is expected to fetch at least $9.5 billion, is just the latest to go.

The telecommunications and space unit is worth between $3 billion and $5 billion, analysts say. There is wide agreement that its value could double by the turn of the century if Hughes were made an independent company.

“By getting into a pure telecom play, a lot more investors would be attracted to the situation,” said Jim Reynolds, vice president of research at Wedbush Morgan Securities in Los Angeles.

Selling shares to the public would help Hughes raise money for the substantial capital investments required in the telecommunications industry.

Among Hughes’ greatest assets is DirecTV, a satellite television service that beams programs into 2.2 million homes via dishes about the size of a pizza. Another unit, DirecTV International, offers service in Latin America and will enter Asian markets at the end of 1997. Despite increased competition from rivals such as Primestar and signs that subscriber growth began to taper off at the end of 1996, some analysts expect DirecTV to claim 10 million subscribers by 2000.

Wall Street is also optimistic about the company’s plans to provide wireless telephone service and about its DirecPC, a high-speed Internet access via satellite.

All of that is in addition to historically manufacturing 40% of the world’s satellites and being one of the world’s leading suppliers of satellite services.

Also possible are sales of parts of the business to individual investors or other companies. AT&T; Corp. already owns a 2.5% stake in DirecTV with an option to increase that to 30% over five years.

The fate of Hughes’ satellite manufacturing facility in El Segundo is more of an open question.

“It’s critical for them to keep the satellite manufacturing,” Reynolds said. “They were able to do DirecTV because they could do the satellites. They’ve got some advanced programs in the works that all depend on satellite manufacturing.”

But Paul H. Nisbet, an aerospace analyst with JSA Research Inc. in Newport, R.I., said the manufacturing business is the one low-margin part of an otherwise very profitable company. Hughes could save money by asking other manufacturers to bid for manufacturing orders. Hughes’ satellite manufacturing unit could probably bring between $2.5 billion and $3 billion from a buyer like Boeing, he said.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Market Leader

Hughes Electronics telecommunications and space unit held the largest share of the worldwide market for commercial and civil satellites in 1996 based on the number and value of satellites launched. Hughes’ DirecTV is also the largest U.S. direct satellite TV service. Market share for each.

SATELLITES: 1996 market share based on value and number launched

Hughes Electronics: 30%

Lockheed Martin Telecommunications: 18%

Space Systems / Loral: 15%

Matra Marconi Space: 10%

Other: 27%

SATELLITE TV: 1996 market share based on number of subscribers

DirecTV/USSB*: 54.6%

Primestar: 36.9%

Echostar: 7.9

Alphastar: 0.7%

* Includes DirecTV and U.S. Satellite Broadcasting. About 1.2 million of the 2.3 million customers who subscribe to DirecTV also subscribe to U.S. Satellite Broadcasting. About 125,000 subscribe to U.S. Satellite Broadcasting alone.

Note: Numbers may not add up to 100% because of rounding.

Sources: Carmel Group, Teal Group. Researched by JENNIFER OLDHAM / Los Angeles Times

*

Also contributing to this report was Times staff writer John O’Dell in Orange County.