Going Its Own Way : Pacific Telesis Stays on Sidelines as Merger Fever Rages
Amid an onslaught of recent telecommunications alliances, one company’s name has been notably absent from the headlines: Pacific Telesis.
While other regional Bell operating companies and communications concerns see the need to combine their strengths, San Francisco-based Pacific Telesis has gone its own way, pursuing a plan to spin off its cellular operations rather than investing in, say, cable television.
Wall Street analysts, who once greeted the spin-off plan with enthusiasm, now seem leery of it following the announcement that Bell Atlantic and Tele-Communications Inc. will merge.
“It’s a misguided plan,” asserted Herb Maher, a telecommunications analyst at Hancock Institutional Equity Services in Boston. “The sum of the parts of the company is greater if the two pieces are kept together.”
California’s largest phone company also faces an increasingly rocky regulatory road toward getting the plan approved. Late Tuesday, the California Public Utilities Commission, which still must vote on whether to allow the split, indicated that it would not consider the plan at its meeting today, as had previously been scheduled.
No reason for the delay was publicly offered, but PUC officials privately revealed a deep and still-unresolved division among the five-member board over how to handle the spinoff and its impact on the company’s remaining operations.
Pac Tel said that, while it is disappointed by the delay, the company remains committed to its plan, which Pac Tel said would enhance the remaining phone company’s wireless opportunities and does not preclude any future multimedia deals with cable operators. Once free of its cellular sibling, Pac Tel officials maintain, the phone company will be allowed to bid for the new franchises the federal government will award next year for the next generation of wireless services.
The spinoff would leave the state’s largest phone company with just its traditional telephone service. So far, the company has not developed--or teamed with partners to create--any new, fast-growing telecommunications services to replace the state-of-the-art cellular unit that generates about $1 billion in yearly sales.
Some analysts argue that Pac Tel’s singular focus on the spinoff over the last two years has allowed the company to slip behind in the race to bring multimedia services to the doorsteps of Californians. Pacific Telesis and Ameritech are the only Baby Bells that have not struck a deal with a cable operator since the telecommunications merger and acquisition rush began early this year.
“In a few years, Pacific Telesis is going to look monumentally stupid,” said Craig Ellis, a telecommunications analyst with Wheat First Butcher & Singer in Richmond, Va. Such comments are a departure from Wall Street’s initial warm embrace of the spinoff plan and provide potential new ammunition to consumer groups in California opposing it. These groups have called on state regulators to require Pac Tel, as a condition of winning PUC approval, to compensate ratepayers who, consumer advocates contend, helped fund development of the company’s cellular technology over the last four decades.
PUC President Daniel Fessler said earlier this week that some of the issues raised by consumer and Wall Street critics of the plan are “legitimate concerns that do make sense.” While Fessler declined to comment further, other PUC officials said he would try to bring his colleagues around to his views before the matter comes up again Nov. 3.
Assuming the PUC approves the plan in two weeks, any diminished enthusiasm for the split on Wall Street is unlikely to undermine the wireless company’s initial $1.2-billion public offering scheduled for later this year.
Since plans for the split were unveiled in April, 1992, investors have bid up Pac Tel’s stock from about $37.50 to its closing Tuesday at $54, a 44% increase. Under terms of the split, Pac Tel’s shareholders will get one share of the new wireless company for every Pac Tel share they hold.
Analysts say investor interest in Pac Tel’s new wireless company, which has tentatively priced its new offering at $20 per share, is running high because the new company is an obvious future takeover target by a larger telecommunications company. Among those most often mentioned is MCI Communications, which has amassed $4 billion specifically to buy its way into the wireless world. After the spinoff, Pac Tel’s wireless company will be the nation’s second-largest non-Bell cellular company, behind only McCaw Cellular, which has agreed to be purchased by American Telephone & Telegraph.
Michael Killen, of Killen Associates, a Palo Alto, Calif. telephone and technology research firm, said Pac Tel’s remaining phone operation may be too small to survive the ongoing rush into nationwide combinations.
As a result, he and others predicted that Pac Tel might be forced to find a merger partner for its phone operations within the next few years. Among potential partners, analysts said, are U.S. West, whose territory surrounds California, and GTE, the state’s second-largest phone company.
Back to Basics at Pac Tel
Unlike other Baby Bells, Pacific Telesis isn’t investing in cable television or trying to acquire movie studios. Instead of forming alliances, in fact, it wants to spin off its cellular operations. More than other regional phone companies, Pacific Telesis is going its own way.
Pacific Telesis lags in some ways... Phone lines operated by the baby bells, in millions Bell South: 19.3 Bell Atlantic: 18.6 Ameritech: 17.5 Nynex: 16.0 Pacific Telesis: 14.8 U.S. West: 13.8 Southwestern Bell: 13.2 *Fiber deployment by miles covered, 1992 Bell South: 35,228 U.S. West: 27,401 Bell Atlantic: 21,300 Nynex: 17,708 Ameritech: 17,300 Southwestern Bell: 17,164 Pacific Telesis: 8,334 *...but its stock has performed well. Monthly closes except latest; adjusted for dividends and stock splits: Tuesday’s close: $54.00, down 0.75 *Pacific Telesis at a Glance The nation’s fifth-largest telephone company in terms of phone lines, it provides local service in California and Nevada.
Headquarters: San Francisco
Chairman: Sam Ginn
Employees: 60,900
1992 FINANCIAL DATA
Sales: $9.9 billion
Profit: $1.1 billion
Earnings per share: $2.83
Regulated operations: Yellow Pages advertising and White Pages through Pacific Bell Directory; cellular service to 832,000 subscribers through Pactel Cellular; paging for 1.1 million customers through Pactel Paging; electronic recovery service for stolen vehicles in five major metropolitan areas through Pac Teletrack.
International operations: A 26% interest in a German cellular and paging company and 49% of a paging service in Thailand. Sources: Kidder, Peabody & Co.; Standard & Poor’s Corp.; Bloomberg Business News
