4 Companies to Offer New Security : ‘Unbundled Stock Unit’ Seen as Preferable to Buybacks

Associated Press

Four major companies announced plans Monday to offer their shareholders a chance to exchange more than $5 billion in stock for a new type of security that could be traded whole or broken into three parts.

The proposal was described as giving high-quality American companies a “serious alternative” to the heavy borrowing usually associated with stock buybacks that have forced other companies to sell off major assets, watch their debt ratings fall and cut spending on items such as research.

The plan’s developer, Ron Gallatin of Shearson Lehman Hutton, cautioned that the new security was “neither a takeover defense nor a takeover deterrent” and said he would not like to see it used by other than top-quality concerns.

Investors are expected to be attracted to features of the new security that would have the same effect as prohibiting a reduction in dividend and guaranteeing a certain minimum appreciation regardless of the stock price.


Government regulators have to review the proposal to ensure that it complies with securities laws.

The proposal comes at a time corporate chiefs are under increasing pressure to increase their stock prices or risk becoming a target in the record-smashing run of takeovers. It also comes as investment firms are trying to lure individual investors back to the market.

The financial services giant American Express Co., food and consumer products firm Sara Lee Corp., health-care products provider Pfizer Inc. and chemicals giant Dow Chemical Co. filed documents with the Securities and Exchange Commission in which they outlined plans to exchange up to 20% of their stock. The proposed exchanges are expected to begin in mid-January.

Shareholders who chose to do so would trade a common share for a new security called an “unbundled stock unit” that would consist of a 30-year bond, preferred stock and a stock appreciation certificate.


Under the plan:

- The bond would carry an interest coupon equivalent to the current dividend rate of the stock and would mature at a premium to the current stock price.

- The preferred stock would entitle the holder to any increases in dividend payments, compared to the current dividend over the next 30 years.

- The stock appreciation certificate would entitle the holder to any capital gain on the stock in 30 years that exceeds the premium allotted to the bondholder.


It is expected that the entire unit, each of its parts and a combination of the preferred stock and stock appreciation certificate would be traded separately on the New York Stock Exchange. The unit would not carry voting rights.

New York-based American Express proposed exchanging up to 60 million of its common shares, or about 14.4% of its stock. That stake was valued at $1.6 billion at the end of last week.

Dow Chemical, based in Midland, Mich., proposed to exchange up to 12 million of its shares, or about 6.5%, worth about $1.2 billion at the end of last week.

Sara Lee, which has its headquarters in Chicago, said it would exchange up to 22 million shares, or about 20%, worth about $987 million at the end of last week.


Pfizer, based in New York, would exchange up to 33 million shares, or 20%, worth about $1.8 billion.

The initial reaction on Wall Street appeared positive. In NYSE trading, American Express edged up 62.5 cents a share to $27.50, Dow Chemical rose $2 to $86.125, Pfizer rose $1.875 to $58 and Sara Lee added 87.5 cents to $45.375.

One of the nation’s top ratings services, Moody’s Investors Service, said Monday that it confirmed its debt ratings for American Express after reviewing its proposal for unbundled stock units.

Moody’s said that although the issuance of the units would decrease American Express’ “financial flexibility, it would not weaken its economic fundamentals to a level that would be inconsistent with its current ratings.”


Shearson’s Gallatin said he hoped the new security would “help bring investors back to the market and strengthen capital formation in America.”