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 to come.
PacTel’s surprise merger agreement with rival Baby Bell SBC Communications Inc. drove PacTel’s stock up almost 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 telecommunications 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.
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 major stakes in both 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.
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 companies have invested heavily in wireless communications systems.
But that wireless investment was taking a heavy toll on PacTel, which has focused on wireless cable TV and “personal communications services” after spinning off its AirTouch cellular subsidiary two years ago.
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 most investors by leaving the dividend unchanged.
“We were scratching our heads when they didn’t cut it,” said Eric Ryback, manager of the Lindner Utility stock fund in St. Louis.
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As it turned out, PacTel was in heated merger talks with SBC at that point--negotiations that remained an extremely well-kept secret: PacTel shares had closed at $27.75 last Friday, barely above the March low price.
On Monday the stock soared $6 to $33.75. Under the deal’s terms, PacTel shareholders will get 0.733 share of SBC for each PacTel share. At SBC’s closing price of $49.875 Monday, the deal is currently worth $36.56 a share to PacTel owners.
The spread between PacTel’s closing price Monday and the deal’s apparent value 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.
As for the takeover price, many of PacTel’s institutional shareholders said they were pleased, despite some concern that PacTel--facing stretched finances and the possibility of a debt downgrade--was selling itself somewhat out of desperation.
“I don’t think they felt desperate, but I think they felt opportunistic,” said Behrens.
Sheldon Lieberman, portfolio manager at Hotchkis & Wiley, which owns 3.5 million PacTel shares, said that although “it’s possible [PacTel] felt desperate, this deal really makes sense.”
PacTel shareholders still face a dividend cut: The company 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 company’s current payout.
But 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 may raise the likelihood of additional mega-deals soon.
“It bodes well for the industry,” argues Ryback. Noting the recent landmark federal telecommunications act, Ryback said that whenever an industry is deregulated, “first you get a breakdown, then you get consolidation.”
Analysts say it’s impossible to determine now which of the other phone giants might end up in mega-deals, or the prices the targets might fetch. Most of the stocks have fallen in recent weeks, partly reacting to higher bond market yields.
Whether additional deals happen soon or not, “the fundamentals of the [major] telephone companies are basically very strong,” says Noel Dedora, analyst at UBS Asset Management in San Francisco. “The stocks go in and out of favor, but these are all formidable competitors.”
