Is Opportunity Calling in Form of Phone Stock?
In less than a decade, 38-year-old Jeffrey Sudikoff has built IDB Communications into the fourth-largest international long-distance phone company. He’s about to find out exactly how much that’s worth on Wall Street.
On or about Nov. 9, the Culver City-based firm’s two largest shareholders will offer their 9.7 million shares for sale on the open market. At the stock’s current price of $48.625 on Nasdaq, the deal would be worth about $500 million, making it the second-largest sale ever of a Nasdaq company’s stock (Henley Group was No. 1, in 1986).
IDB has burgeoned into one of the country’s fastest-growing telecommunications companies in recent years by in effect playing mouse to AT&T;’s elephant: Internationally, the two compete for the same food (revenue). But IDB has been able to dart with relative ease among the plodding elephant’s feet, picking off choice corporate and government long-distance service assignments.
There’s more to it than opportunism, of course. IDB has built a state-of-the-art global phone network, competes aggressively on rates and has cultivated a can-do reputation with many foreign governments, from Russia to Israel to China. “Service, service, service--that’s how they do it,” says Carl Gates, analyst at Friess Associates, a Delaware firm that is a large IDB shareholder.
Boosted by internal growth and by acquisitions, IDB is expected to post revenue this year of $300 million, up fivefold from 1989. Earnings should hit $22.7 million this year, up from $1.8 million in ’89.
But to finance its last two major acquisitions of international long-distance networks, IDB issued stock to the networks’ parents: Switzerland’s Tele-Columbus and Oregon-based Pacific Telecom, a unit of utility giant Pacificorp.
Now Tele-Columbus and Pacificorp have decided to cash out. “Neither one had planned to be a long-term investor,” Sudikoff contends. Even so, the deal presents a big challenge for IDB.
The 9.7 million shares to be sold represent almost half of IDB’s total outstanding shares. That makes it critical that IDB drum up heavy demand among institutional and individual investors--even though IDB itself won’t get a dime of the proceeds. If demand isn’t strong enough, the market price of the stock could tumble under the sheer weight of so many shares hitting the market at once.
So far, Wall Street appears relatively optimistic about the deal. Though IDB’s stock has slumped from a peak of $58.75 on Oct. 14 to $48.625 now, much of that can be blamed on recent profit taking in the Nasdaq market in general.
To find buyers for the 9.7 million shares, IDB has enlisted Merrill Lynch to lead the underwriting. Sudikoff and IDB President Ed Cheramy are now on a global road trip to sell their story to investors.
In part, their timing couldn’t be much better: Merger mania among telecommunications and cable TV stocks this year, and wild hype about the “information highway,” have driven shares of IDB and other niche telecom players up sharply.
Because IDB offers public-access long-distance services to 45 countries and also has long-standing communications transmission relationships with the three major TV networks and with CNN, the company is viewed as a potential takeover candidate for a Baby Bell--if and when those giants are allowed into long-distance.
But Sudikoff and Cheramy are trying to sell IDB’s appeal on the firm’s internal growth prospects. With just 2% of the international long-distance market, Cheramy contends that IDB remains too small for AT&T;, MCI and Sprint to care much about crushing it with global rate wars.
Meanwhile, Cheramy says, acquisitions have left IDB with plenty of capacity on its global satellite and fiber-optic networks--enough to assure strong growth without additional heavy capital outlays. IDB also gets credit for being a ruthless cost cutter in its drive to boost its bottom line.
Though some Wall Streeters criticize the firm for over-hyping itself (it is a prolific press release generator), IDB also has delivered: Earnings per share, 76 cents in 1992, should reach $1.12 this year. In 1994, IDB says $1.60 is reasonable.
The question for investors is, what’s that growth worth? At $48.625, the stock is priced at 43 times 1993 earnings. If IDB can keep its expansion on track, that might look cheap in a few years. But some pros warn that 43 times earnings leaves no room for a corporate stumble along the way.
For investors uninterested in IDB, this deal bears watching simply for its size. If it doesn’t fly well, it could signal a change in investors’ appetite for recently red-hot communications issues--and possibly for small stocks generally.
Flying High
Shares of international long-distance firm IDB Communications have nearly quadrupled since February, 1992, as the company’s sales and earnings have rocketed.
Month-end prices on Nasdag, except latest
