COLLAPSE OF A MEGA-MERGER : Face It, This Was Never Love at First Sight
As a watershed event for either the telecommunications industry or the stock market overall, there may be less than meets the eye in the failure of the TCI/Bell Atlantic Corp. merger.
In Wall Street vernacular, this isn’t likely to be “UAL II.”
On Oct. 13, 1989, the termination of the planned mega-buyout of United Air Lines triggered a 190.58-point plunge in the Dow industrials and heralded the end of late-1980s junk bond boom. The junk market’s demise, in turn, helped set the stage for the credit squeeze of 1990 and the bear market that ravaged stocks later that year.
This time, Bell Atlantic’s inability to reach a deal with Tele-Communications Inc. says plenty about the danger of over-hyping the development of the nation’s information superhighway. But it says very little about the stock market or the long-term potential for takeovers in multimedia or other industries, Wall Streeters say. “It’s not that they couldn’t do this deal; it’s that they didn’t want to do the deal,” noted one New York takeover-stock trader, or arbitrager.
The two companies couldn’t agree because Bell Atlantic’s stock has been spiraling lower ever since the deal was announced in October--from a peak of $69.125 then to a low this week of $52.25.
Because the deal’s currency was a swap of Bell Atlantic shares for TCI, each drop in the phone company’s stock reduced TCI holders’ payoff.
Naturally, Bell Atlantic and TCI slapped much of the blame for the deal’s collapse on the Federal Communications Commission. With Tuesday’s order of another rollback in cable TV rates, the FCC in effect made it extraordinarily difficult for Bell Atlantic to put a value on TCI and thus hammer out final stock-swap terms, the two firms said.
Perhaps. But the fact is, the market wasn’t enamored of this deal from the start. If Bell Atlantic stock had held at even $60, TCI would have had a much harder time jilting its suitor.
Why have investors treated Bell Atlantic stock so badly, when the marriage would have created the nation’s leading telecommunications company? In part, this was a case of lousy timing: The deal was announced during the same October week that 30-year Treasury bond yields hit 5.79%, the lowest in 21 years. Since then, the economy’s strength has helped pull bond yields back up to 6.73%.
Higher interest rates make it hard for stock prices in general to advance, because money market funds, bank CDs and bonds are tougher competition for stocks as yields go up. And of all stock groups, rising rates pose the biggest problem for utilities such as phone companies, because the main lure of those stocks is their dividend yield.
At last October’s peak price of $69.125 for Bell Atlantic, the yield provided by its $2.68-a-share annual dividend was a mere 3.9%. Now, with competing interest rates sharply higher, Bell Atlantic’s yield also is higher--not because the company raised the dividend, but because the stock price has been pushed lower. With the shares at $54.50 today, the dividend yield is 4.9%.
Hold on a minute, though. When Bell Atlantic agreed to buy TCI, Wall Street was supposed to view the phone company in a different light from then on. This was no longer a stodgy, slow-growing utility; by marrying its telecommunications know-how with TCI’s premier cable TV franchise, Bell Atlantic was on the verge of becoming a classic 1990s growth stock, many analysts argued. The dividend wouldn’t matter anymore.
Not so--or at least not yet. “Wall Street has been reluctant to buy that story,” admits Hobart Buppert, co-manager of the Flag Investors Telephone Income stock mutual fund in Baltimore.
Investors have taken a sober second look at the information highway’s potential since the mania that engulfed the telecommunications industry last fall. And for the phone companies in particular, Buppert says, “I think investors just aren’t sure that there’s going to be as high a growth rate in the future as some people originally made it out to be.”
Optimism about the gigantic Baby Bell companies suddenly producing 15% to 20% annual earnings growth by swallowing cable TV companies was plainly unwarranted, Buppert says. More realistic then, and now, he says, is that the leading companies can gradually boost their current low 6% to 8% earnings growth rates to the 10% range.
The good news here is that the pressure on the phone titans to do something to enhance their growth prospects will remain intense. Inevitably, that will mean more deals between phone and cable companies and massive spending to upgrade phone and cable systems for the interactive world.
For that reason, the current vicious selloff in telecommunications stocks may be a gift for long-term investors. Indeed, cable TV equipment maker General Instrument on Thursday said that even with a slowdown in cable company spending this year because of the FCC decision, it still expects to make analysts’ earnings estimates.
New York-based money manager Morris Mark argues that the negative psychology toward the cable company stocks perversely means that “the environment will never be better as far as getting an attractive price on these issues.”
The risk, however, is that the FCC’s cable rate rollback move marks the beginning of a long period of regulatory uncertainty for the players on the info highway, says David Shell, senior analyst at Eagle Asset Management in St. Petersburg, Fla.
“It’s hard to take a two- to three-year view of this industry, because you don’t know what the (government) is doing,” Shell fumes. He contends that unless Congress agrees soon on a framework for future telecommunications competition--and unless the companies are allowed to earn decent returns on their investment--the promised growth explosion in multimedia could be severely stunted.
Trouble in Telecom
How shares of companies tied to the information highway have tumbled from their highs reached over the past year.
‘93-94 Thurs. close Pctg. Stock high and change drop QVC Network * 73 44 3/4, -2 1/8 -39% Tele-Comm. A * 33 1/4 22 3/8, -1 7/8 -33% Scientific Atlanta 38 7/8 26, -2 3/8 -33% Comcast A * 28 1/8 19 1/2, -1 -31% Liberty Media A ** 32 22 1/2, - 5/8 -30% Ericsson Tel. * 60 1/4 43, -2 1/2 -29% Century Comm. A ** 14 1/4 10 1/4, - 1/2 -28% General Instrument 61 3/4 44 5/8, -6 1/8 -28% Turner Broad. B ** 29 3/8 23, - 3/4 -22% US West 50 3/4 39 3/8, + 1/8 -22% Falcon Cable ** 15 11 3/4, -1 -22% Bell Atlantic 69 1/8 54 1/2, +1 3/4 -21% Time Warner 46 7/8 37 5/8, - 5/8 -20% AT&T; 65 52 3/8, - 5/8 -19% Gaylord Entertain. 32 1/2 27 3/4, - 1/8 -15% Cablevision Sys. ** 72 62 1/4, -5 1/4 -14% Ameritech 45 1/2 40 1/8, - 3/8 -12% S&P; 500 index 482.00 464.26, -6.4 -4%
Stocks trade on NYSE except: * on Nasdaq; ** on Amex
