SHAREHOLDER IMPACT : For Phone Stocks, It Has a Nice Ring
Just weeks after mulling a potentially devastating dividend cut, Pacific Telesis Group on Monday gave its shareholders back nearly all of their recently lost stock value, with the likelihood of more payback to come.
PacTel’s surprise merger agreement with rival Baby Bell SBC Communications Inc. drove PacTel’s stock up $6 to $33.75, or 22%, and boosted the shares of most other major telephone stocks as well--as Wall Street bet on another round of deal-making in the rapidly consolidating telecom field.
The only big loser Monday among the phone stocks was SBC, whose shares fell $2.75 to $49.875 on the New York Stock Exchange. Yet many analysts said the decline wasn’t a negative commentary on the deal, but rather reflected Wall Street arbitrageurs’ normal response of buying a target company’s shares while selling the acquirer’s shares as a hedge.
Indeed, many institutional investors who own SBC expressed glee at the deal and with the $16.7-billion price tag.
“I think it’s a very positive deal,” said Bruce Behrens, co-manager of the Baltimore-based Flag Investors Telephone Income stock mutual fund, which owns big stakes in SBC and PacTel. And though some analysts raised the possibility that another of the Baby Bells could start a bidding war for PacTel, “I don’t see a better fit” than PacTel and SBC, Behrens said.
Some PacTel shareholders, however, may well wonder if SBC is getting a substantial bargain. Its offer of 0.733 SBC shares for each PacTel share values the deal at $36.56 a share for PacTel owners. That isn’t much above PacTel’s recent peak of $35.25.
With its finances stretched and its debt rating facing a possible downgrade, could PacTel be selling itself at a “distressed” price?
“I don’t think they felt desperate, but I think they felt opportunistic,” argues Behrens.
Sheldon Lieberman, portfolio manager at Los Angeles-based Hotchkis & Wiley, which owns 3.5 million PacTel shares, said that although “it’s possible [PacTel] felt desperate, this deal really makes sense.”
A key selling point of the deal, besides the combined entity’s ability to be a long-distance gateway to Latin America (through SBC) and Asia (via PacTel), is that both firms have invested heavily in wireless communications systems: SBC in basic cellular, PacTel in more exotic wireless businesses such as wireless cable TV and cellular-like “personal communications services.”
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But that wireless investment has been taking a heavy financial toll on PacTel and on its shareholders, since the company spun off its AirTouch cellular subsidiary two years ago--essentially creating a new competitor.
PacTel’s recent earnings have been barely enough to cover its $2.18-a-share annual dividend, and the company had little prospect of significantly boosting earnings before 1999.
In the first quarter, PacTel appeared to subtly warn investors that the dividend was likely to be cut to conserve cash for the company’s expansion plans. That helped drive the stock down from a high of $35.25 in January to $26.75 by late March.
But when PacTel’s board met on March 22, it shocked Wall Street by maintaining the dividend.
“We were scratching our heads when they didn’t cut it,” said Eric Ryback, manager of the Lindner Utility stock fund in St. Louis.
As it turned out, PacTel was in heated merger talks with SBC at that point--negotiations that began less than a month ago, and which remained an extremely well-kept secret: PacTel shares had closed at $27.75 last Friday, barely above the March low price.
At $33.75 at Monday’s close, PacTel traded nearly 8% below the assumed deal value of $36.56. That spread reflects in part the risk that arbitrageurs (traders who specialize in takeover stocks) feel they are taking in buying PacTel now, given the regulatory approval process that lies ahead.
So if the value of SBC stock holds up, PacTel owners’ ultimate payoff will be higher than Monday’s closing stock price suggests.
Even so, PacTel shareholders still face a dividend cut: The company on Monday said it will reduce its payout in the second quarter to 31.5 cents a share from 54.5 cents currently. And when the deal is consummated, PacTel holders who were used to getting $2.18 a share in dividends annually will get $1.72 a share from SBC, the acquiring company’s current payout.
But with SBC stock, PacTel owners will be getting a much stronger security than PacTel could have hoped to be anytime soon. And SBC has been raising its dividend annually; PacTel hasn’t boosted its payout since mid-1992.
As for the other major phone companies, including the five other Baby Bells and their local-service and long-distance rivals, the PacTel/SBC deal raises the likelihood of additional deals soon.
The recent federal telecommunications deregulation act opened the door to more deals, yet many of the big telecom stocks have fallen 10% or more from their recent peaks anyway--dragged lower in part by rising bond market yields.
Picking acquirers and targets--and guessing at takeover prices--remains a crapshoot. But Noel Dedora, analyst at UBS Asset Management in San Francisco, argues that with the Baby Bells in particular, “There’s been a tendency to underestimate the capabilities of these companies historically.”
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Wall Street Dials Up Again
The PacTel-SBC Communications merger announcement boosted all of the Baby Bell stocks except for SBC on Monday. Competitors AT&T;, GTE and Alltel also got a lift, while Sprint eased and MCI shares were unchanged. Most of the big phone stocks are trading 10% or more below their recent peaks.
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52-week: Mon.close Div. Stock high low and change yield Alltel $35.63 $23.25 $32.63, +1.75 3.19% Ameritech 66.88 41.25 57.13, +2.63 3.71 AT&T; 68.88 47.88 62.25, +1.13 2.12 BellAtlantic 74.88 52.00 63.13, +1.25 4.53 Bell South 45.88 29.13 38.75, +1.75 3.72 GTE 49.25 31.88 44.88, +1.13 4.19 MCI Communications 31.13 19.00 30.25, unch. 0.17 NYNEX 59.25 39.25 53.00, +3.13 4.45 Pacific Telesis 35.25 25.63 33.75, +6.00 6.46 SBC Communications 60.25 41.63 49.88, -2.75 3.44 Sprint 45.50 30.38 37.75, -0.25 2.64 U S West Commun. 48.38* 28.38 33.63, +1.25 6.36
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* High price before spinoff of U S West Media last November.
Source: Reuters
