Dial ‘S’ for Spinoff : PacTel’s Divestiture Study May Be a Ploy to Loosen Regulatory Reins : NEWS ANALYSIS
Pacific Telesis’ plan to study a possible spinoff of its local telephone companies may be a high-profile ploy to press its case that regulations limiting its activities need relaxing, according to some industry observers.
But overall, both market analysts and consumer groups expressed some skepticism and puzzlement about the company’s actual goals and the possible results of such a spinoff.
PacTel is a holding company that was created in 1984 by the court-ordered breakup of AT&T;, presided over by U.S. District Judge Harold H. Greene, who still exercises influence over the regional Bell companies from his federal bench in Washington. The company is made up of regulated companies--the local telephone concerns under the jurisdiction of state commissions--and unregulated companies such as its cellular and cable units.
“I don’t believe they have any intention of selling the Bell” companies, said Berge Ayvazian, a telecommunications consultant with Yankee Group, a Boston-based technology consulting firm. The move, he said, is an attempt to “ring an alarm bell at the Public Utilities Commission, in Judge Greene’s office and in the Congress and at the FCC (Federal Communications Commission). . . . In other words, if the government regulators are going to say to Pacific Telesis, ‘You are tied to this anchor,’ well, they’ll cut anchor.”
Ayvazian said PacTel’s management has studied the competitive positions of the Bells and has found that the “whole corporation is constrained by market erosion and regulatory restrictions.” One example, he said, is the company’s outstanding pending application to supply cable television service in Chicago, which has been held up because of questions about its regulated telephone business, although its cable unit is unregulated. More significant, Ayvazian said, is the steady erosion of market share for Pacific Bell, as competitors chip away at its market. For its part, Pacific Telesis said it is only studying its options and specifics would be months in coming.
William R. Nusbaum, an assistant vice president for corporate strategy, said the company has hired two outside firms to help conduct and analyze the study. They are Pillsbury, Madison & Sutro, a San Francisco law firm that has long represented the company, and Sterling Payot, a small San Francisco investment bank. One of that firm’s principals is Donald E. Guinn, retired chairman and chief executive of Pacific Telesis and current chairman emeritus.
Asked whether Pacific Telesis had any “preconceived notions” about the outcome of such a study, Nusbaum said no.
“We think the stock is undervalued,” he said, reiterating a belief of Chairman and Chief Executive Sam Ginn that Wall Street these days seems to place a higher value on “pure-play entities” than on hybrids.
Investors gave Pacific Telesis a modest show of support. In trading on the New York Stock Exchange, the company’s shares rose $1.75 to $41.75.
There were plenty of skeptics as to whether PacTel’s stated interest in raising stockholder value can be achieved--at least for the regulated business.
“It raises some interesting questions,” said Robert B. Morris III, an analyst with the San Francisco office of investment firm Goldman Sachs & Co., who counts himself among the skeptics for now.
For starters, Morris wondered, how attractive can local, regulated U.S. phone companies be “if divesters and sellers are coming out of the woodwork,” and most investment money these days is going into phone companies in such countries as Mexico and New Zealand?
Moreover, is this a sign that the changes the industry has been seeking in federal regulations might not be forthcoming as quickly or constructively as hoped? If that’s the case, telecommunications companies could be foreseeing an indefinite future hampered by constraints.
Then again, a consumer advocate at Toward Utility Rate Normalization, a San Francisco group, described her response to the prospect of a spinoff of Pacific Bell and Nevada Bell as one of “guarded optimism.”
“Theoretically, this could help ensure that monopoly services (such as local telephone service) don’t subsidize competitive services like cellular or cable TV,” said Regina Costa, a telecommunication analyst at TURN. That would be good news for ratepayers.
As they digested the news Thursday, many analysts and consultants agreed that the big challenges--and potentially the big opportunities--would lie with the phone companies, rather than with the fast-growth, higher-technology businesses.
After years of sluggish growth, Pacific Bell and the tiny Nevada Bell could be free to focus on building their businesses, even though they would be under the same regulatory restrictions as before.
“What’s most interesting is what happens with the telephone companies,” said Peter Bernstein, a telecommunications analyst with Probe Research in Cedar Knolls, N.J. “Maybe a more focused management would be able to define a vision and react more quickly. That could be good for ratepayers.”
Efforts at breaking off pieces of companies have been tried in the past, with mixed results. In 1988, US West, the Denver-based regional Bell holding company, sold a 19% stake in its cellular unit for $190 million, only to buy it back a year later for $428 million.
Times staff writer Susan Moffat in Los Angeles contributed to this story.
AFTER MA BELL, MORE FAMILY BREAKUPS? Telecommunications companies like Pacific Telesis want to compete with cable television and newspapers in the business of delivering information. Now, regulations aimed at protecting residential phone users from rate hikes prevent Bell operating companies like Pacific Bell from entering these businesses freely. PacTel is studying whether separating its regulated local phone business from its high-growth, potentially high-profit cellular, cable, and international operations could boost the performance of the latter.
REGULATED BUSINESSES Local Phone Companies Pacific Bell Nevada Bell Outlook: slow growth, profits limited by regulation
Competitors: Companies including Teleport are slowing encroaching on local business services, though residential services will probably continue as a monopoly.
Yellow Pages Outlook: This cash cow is expected to continue good sales growth. Competitors: Directory publishers including Donnelly, GTE, United
Consumer advocates want to keep this barrier strong so that telephone users don’t end up financing risky ventures in new businesses.
UNREGULATED BUSINESSES Wireless Communications PacTel Cellular PacTel Paging PacTel Teletrac (vehicle tracking) Outlook: though Los Angeles market is reaching saturation, other markets, including foreign ones, have good growth prospects. Competitors: Cellular providers including GTE and McCaw. Home Entertainment PacTel Cable (UK only)
Outlook: TK Competitors: Cable tv companies International Pacific Telesis International (Germany, Japan, Portugal, South Korea, Thailand) Outlook: robust growth expected to continue in cellular services and long-distance communications. Competitors: foreign phone companies, cellular phone companies, American cellular services, paging and fleet communications.
POTENTIAL FUTURE BUSINESSES
Information Services Electronic yellow pages, classified ads, entertainment, news, medical X-ray viewing by phone, etc. Outlook: Potentially a huge market, but intense competition from entrenched players. Competitors: Cable tv companies, newspapers, Prodigy.
Cable Television Outlook: Potential for growth, but intense competition; depends on changes in interpretation of regulation. Competitors: Cable TV companies. Newspapers and cable companies want to keep the barrier to entry in information services up so telephone companies can’t compete freely in delivering news, entertainment, or computerized information.
LOCAL PHONE SERVICE’S CONTRIBUTIONS SHRINK
As cellular phones, cable tv, and other businesses grow, traditional local phone service is contributing relatively less to Pacific Telesis’s revenues and earnings.
Pacific Bell Revenues
Pacific Telesis Group Revenues
Pac Bell Net Income
Pacific Telesis Group Net Income
Source: Pacific Telesis, Venture Associates and industry sources. Compiled by SUSAN MOFFAT
