| BUSINESSWEEK ONLINE : OCTOBER 18, 1999 ISSUE | ||||||||
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| COVER STORY
Why These Sprint Shareholders Are Eating Dust Their wireless tracking stock is diving because the takeover premium seems puny. But that may be shortsighted Are you kicking yourself for not buying stock in MCI WorldCom (WCOM) or Sprint (FON) before the big merger was announced? Just be glad you aren't a shareholder in Sprint PCS (PCS), the separately traded tracking stock that represents Sprint's wireless operations. Even though Sprint's nationwide wireless network is considered the most important asset WorldCom is getting out of the $129 billion deal, PCS shares are on their way down. From a high of 79 1/4 on Oct. 4, the day before the deal was announced, shares in Sprint PCS have fallen 12%, to close on Oct. 7 at 69 15/16. By comparison, after falling the day the deal was announced, shares in WorldCom were up a total of 7% by Oct. 7, and shares in Sprint were up 4%. Message boards have been filled with postings from dismayed PCS shareholders trying to figure out why they're missing out on post-deal gains. In one Oct. 6 posting, an investor wrote: "FON is up almost 5 today. Even WCOM is up almost 3. Does anyone have any idea why PCS is not going up, up and away?" Wall Street analysts do. In fact, they aren't surprised at all to see Sprint PCS shares fall. After all, the stock had already spiked on takeover speculation, more than tripling this year alone. The simple explanation for the decline is that shareholders are selling at what appears to be a short-term top for the stock. "The story is over," says Jeff Hines, an analyst with Deutsche Banc Alex Brown, who downgraded Sprint PCS to "market underperform" from "market perform" on Oct. 6, largely because he believes it's overvalued relative to other North American wireless carriers. AN $11 PREMIUM. A closer look at the latest deal reveals another reason for reassessing the value of PCS, says David Freedman, an analyst at Bear Stearns. For each Sprint PCS share, holders of the stock will get one share in a newly issued WorldCom PCS tracking stock. They also will get 0.1547 shares of WorldCom common stock. The fractional WorldCom share, worth about $11, is essentially the takeover premium for Sprint PCS, discounted by the risk that the deal won't happen and the length of time until it does go through. The deal is expected to close in the second half of 2000, but it has to overcome regulatory hurdles. "I'd say it is barely going to go through," says Robert Wilkes, an analyst with Brown Brothers Harriman. A premium of 15 shares of WorldCom for every 100 shares of Sprint PCS you own doesn't sound like such a bad deal. The problem is that investors had already factored in a larger takeover premium than that. Essentially, WorldCom isn't really even buying the PCS unit, says Hines. It's just issuing a different tracking stock. Now that the chance of an outside buyer coming in and paying a huge premium has been eliminated, it's not surprising that the stock fell, he says. Bear Stearns' Freedman looks at the deal this way: According to the terms, one share of Sprint PCS equals one share of the new WorldCom PCS plus $11 in WorldCom stock. To restate that equation, one share of WorldCom PCS equals one share of Sprint PCS minus $11. Given the roughly $70 price for Sprint PCS, if you were to buy the Sprint PCS today, you'd basically be buying the WorldCom tracker for $59. OTHER POSSIBILITIES. Both Freedman and Hines believe that other wireless plays are better deals. "Why not switch into one of the North American nationwide carriers?" Hines suggests. He recommends cheaper stocks such as Nextel (NXTL) and VoiceStream (VSTR), or Canadian carriers Microcell (MICTF) or Clearnet (CLNTF). Another possibility for PCS shareholders who want to stick with the Sprint brand name, he says, is to buy newly public AirGate PCS (PCSA), which as a Sprint affiliate is building out the Sprint network in the Southeast U.S. Freedman is telling investors to focus on VoiceStream. Of course, concerns over the valuations of fast-growth companies often end up as evidence of excessive short-term thinking, and Sprint PCS's current price slide could eventually prove to be a buying opportunity. With more than 4 million wireless subscribers, PCS is leading the industry in growth, according to the company. PCS also boasts 1.7 million paging and messaging customers. Volume in Sprint PCS shares has been running lately at twice its normal levels, proving that a lot of buyers are getting into the stock these days. Standard & Poor's telecom analyst Philip Wohl argues that "the Sprint PCS tracking stock has performed spectacularly since it was issued and should continue to do well as an MCI WorldCom tracking stock." For now, Sprint PCS is trading based on the merger news. But once it starts trading on company fundamentals, the price will again reflect the huge growth opportunities in the wireless business that attracted WorldCom in the first place. Sprint PCS shareholders may be smarting now. But they've had little reason to complain so far, and if they stick around for the long term, they should eventually have reason to gloat once again. By Amey Stone in New York _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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