Baby bell grows up: PacTel wireless group gains independence

Mobile Phone News, Dec 21, 1992

In a move to increase shareholder value and to enhance financial flexibility, Pacific Telesis Group is spinning off its wireless group, PacTel Corp., into an independent company. The board of directors unanimously voted to form an independent group, PacTel Wireless that includes PacTel Cellular, PacTel Paging, PacTel Teletract and Pacific Telesis International.

Pacific Telesis will continue to own Pacific Bell, Pacific Bell Directory, Nevada Bell and several other subsidiaries. Together the Bell units account for approximately $8.9 billion of Pacific Telesis' $10 billion annual revenues.

The spinoff is contingent on many factors including regulatory and tax reviews and the recapitalization of PacTel Corp. whose annual revenues are $1 billion. Pending separation approval, the new wireless group will be recapitalized at $750 million, to be raised by a public equity offering, private investors or a combination of the two.

PacTel said its stockholders' interests were the basis for its decision. At the end of the separation process, the shareholders will have stock in both companies. The board believes separately traded stocks will carry more long-term value than current Pacific Telesis stock.

Ultimately, share owners want stock that increases in value, so PacTel's two offerings will give shareholders both a high growth wireless stock and a bell operating company stock with steady dividends, Lee Cox, PacTel group president told us. After the announcement, Wall Street analysts changed their Pacific Telesis Group's stock rating from sell to hold, advising stockholders to wait until the stock reaches $45 to $46 per share to sell. Currently, there are about 404 million shares outstanding with 34.6 percent institutionally held.

In April, PacTel began an investigation on spinning off its telephone businesses from Pacific Telesis--the holding company--and combining Pacific Telesis with PacTel Corp.'s wireless activities. "Initially, legal obligations to business partnerships made spinning off Pacific Bell our only viable option," said Sam Ginn PacTel Corp. chairman. "Since then, we've determined that we can solve these legal issues and we have settled on a preferable alternative." In April's proposal may have had negative credit implications for Pacific Telesis Group's debt ratings and its guaranteed subsidiary, because, non- telephone company assets and operations are significantly more risky than core telephone operations, said Moodys' Investor Service.

With the new plan, Pacific Telesis Group will spin off its wireless investments, but will continue to own Pacific Bell and its other telephone operations. The plan preserves Pacific Telesis Group's claim on Pacific Bell's dividends and eliminates the business risks associated with the company's wireless activities, Moodys' said.

...For Investors, New Companies Have Different Growth Strategies

Bell companies are large, slow-growing businesses with steady revenues and stock dividends; and wireless operations, on the other hand, are high-growth, rapidly expanding companies, said Cox.

Ginn said: "PacTel Corp. is envisioned as a growth-oriented company, reinvesting in the business rather than paying dividends. Financial markets tend to place a higher value on single-focused organizations. Pacific Telesis has been a hybrid--a combination growth stock and a steady yield stock. Following the spinoff, investors will be better able to match their stock holdings to their financial objectives."

The spinoff will provide the two independent companies with more financial flexibility as they continue to grow, Ginn said. PacTel Corp. will be able to seek new financing sources to pursue domestic and international opportunities.

The company is active in worldwide wireless system development and has cellular joint ventures in Japan, Germany, Portugal, and France. It is targeting other Asian and European wireless markets for future projects. "The spinoff should improve PacTel Corp.'s ability to attract strategic partners in overseas ventures," Ginn said.

...Separation Gives MFJ Relief

The spinoff will alleviate many of the modified final judgement (MFJ) legal and regulatory issues that have restricted PacTel's cellular operations. The MFJ restrictions were imposed by Judge Harold Green in 1984 with the AT&T divestiture and subsequent formation of seven Bell operating companies.

The restrictions barred PacTel Cellular from manufacturing telecom equipment and offering long-distance service. Although "the company does not want to bend metal [manufacture equipment]," said Cox, the company no longer will be prohibited from manufacturing equipment. Ginn was adamant at a recent press conference that "Judge Green will have no relationship with the new company and Green will not have to approve any portion of the spinout."