HEROES
PRIME SERVICE (NYSE: PRS), the nation's
second largest equipment rental company, jumped $6 7/8 to $31 3/4 after agreeing
to be bought out by Swedish company Atlas Copco for $32 per share in cash.
Prime Service rents its equipment mainly to construction and industrial
companies, and as such is heavily capital intensive. Last year, the company
generated about $51 million in gross cash flow, which was offset by $67 million
in net capital expenditures. This year, annualized gross cash flow is running
about 20% above last year, but the company is still deeply free cash flow
negative. Standard & Poor's put Atlas Copco on CreditWatch with negative
implications, as the acquisition takes the company from a net cash positive
situation to a debt/capital ratio over 30%.
Charlie Munger investment vehicle WESCO FINANCIAL (AMEX: WSC) surged
$37 1/2 to $302 after the New York Times ran a piece about the company this
weekend highlighting the 80% ownership interest of, and similarity to,
BERKSHIRE HATHAWAY (NYSE: BRK.A). Munger is the chairman at Wesco
and the vice-chairman at Berkshire. The article says that "...[at] Friday's
closing price of $264.50, Wesco's shares are certainly more affordable than
Berkshire's A shares, which closed on Friday at a lofty $45,400 apiece."
Based on share price alone, one can't really say which is more "affordable."
Such a priori judgment reinforces the bad investment habit of valuing
a company based on share price. At $50,000 per share, would Microsoft be
less affordable if it had 2 million shares outstanding? No, it'd be a steal
at that price, compared to its current market cap. Potential owners of Berkshire
or Wesco or Microsoft are urged to look behind the share prices, as fancy
facades can sometimes hide sinkholes and humble storefronts sometimes house
cash cow businesses.
Property/casualty insurer AMERICAN STATES FINANCIAL CORP. (NYSE: ASX)
gained $7 1/4 to $45 3/8 after insurance company LINCOLN NATIONAL (NYSE: LNC) agreed to sell its 83.3% interest in the company to broadline insurer
SAFECO CORP. (Nasdaq: SAFC) for $47 per share in cash. Lincoln National
says it will focus on its retail financial products business in annuities,
life insurance, and mutual funds, and that it may use the $2.35 billion in
cash raised from this sale to make an acquisition in the money management
business. With this deal, Seattle-based Safeco expands its property/casualty
reach in the Midwest and strengthens its position in the Northwest.
BANKAMERICA CORP. (NYSE: BAC) picked up $3/4 to $124 after announcing
that it will pay around $540 million to acquire San Francisco-based investment
bank and asset manager Robertson Stephens, Inc. According to Dow Jones, the
deal went off at 5 times book value, but in economic terms it really went
off at 3 to 3.5 times book value, net of the present value of tax benefits
that will come BankAmerica's way. DONALDSON, LUFKIN & JENRETTE
(NYSE: DLJ) gained $4 5/8 to $56 3/8 on the news as it is now only priced
at 2 times book value. The retail asset management business of Robbie Stephens
is a particularly attractive facet of the deal and of many potential deals
out there, as banks are continually looking to smooth earnings. An annuity-like
flow of income from the asset management business fits that bill nicely.
QUICK TAKES: NOBEL INSURANCE LTD. (Nasdaq: NOBLF) rose $1 15/16 to $14 5/8 after the Bermuda-based specialty reinsurer said it has hired Donaldson, Lufkin & Jenrette to help it review strategic options, including possibly selling the company... Network security software company AXENT TECHNOLOGIES (Nasdaq: AXNT) rose $2 to $17 1/8 on announcing software that addresses "notorious Windows NT security gaps, including the NTCrack, Insecure Registry and the ANONYMOUS logon loophole"... Boring Portfolio holding ATLAS AIR (Nasdaq: ATLS) climbed $3 3/4 to $32 1/2 after the air cargo carrier announced that it will purchase ten new Boeing 747-400 aircraft... Research Triangle-based CREE RESEARCH (Nasdaq: CREE) added $1 3/8 to $14 3/8 after demonstrating its "electrically pulsed gallium nitride based blue laser" at room temperature... ARKANSAS BEST CORP. (Nasdaq: ABFS) rose $3/4 to $8 after Alex. Brown raised its rating on the freight company to "buy" from "market perform"... Year 2000 company COMPLETE BUSINESS SOLUTIONS (Nasdaq: CBSL) added $2 3/8 to $21 1/2 on announcing a $4 million contract with Chrysler... Cable modem maker ZENITH ELECTRONICS (NYSE: ZE) gained $1 3/4 to $12 3/4, while cable box makers GENERAL INSTRUMENT CORP. (NYSE: GIC) moved up $2 1/4 to $26 and SCIENTIFIC ATLANTA (NYSE: SFA) gained $1 5/8 to $19 1/2 on hopes that COMCAST (Nasdaq: CMCSA) will be purchasing some of their products with the $1 billion it will receive from MICROSOFT (Nasdaq: MSFT)... EXCEL COMMUNICATIONS (NYSE: ECI) rose another $2 1/8 to $22 7/8 following Friday's announcement that it will merge with interexchange carrier TELCO COMMUNICATIONS GROUP (Nasdaq: TCGX)... COMPREHENSIVE CARE CORP. (NYSE: CMP) sat up $1 5/8 to $15 1/8 on announcing that it has sold a Cincinnati hospital for $3 million and that it is contemplating the sale of a Texas facility... WESTINGHOUSE ELECTRIC (NYSE: WX) powered $1 7/8 higher to $21 3/4 on the strength of a "strong buy" recommendation from Alex. Brown... Telecom products manufacturer SUPERIOR TELECOM (NYSE: SUT) rose $1 3/4 to $27 1/4 on reporting Q4 EPS of $0.72, beating estimates of $0.60.
GOATS
PERKINS FAMILY RESTAURANTS (NYSE: PFR) was slammed for a $2 1/8 loss to $11 1/2 as the limited partnership reminded its investors about a little tax change that was put in place by the Tax Reform Act of 1986, under which almost all pass-through types of businesses would have to convert to regular corporations by the end of 1997. Perkins, a stable chain of franchised and owned restaurants similar to Denny's, has been able to pass through to limited partners their share of the business's earnings without double taxation, as limited partnership earnings are only taxed at the individual level. The only problem with this arrangement is that it's hard to internally fund improvements, thereby making the limited partnership take on debt. The company's fat dividend will probably fall from the near 10% range, but buying back shares is one good way for a company to return capital to owners without two layers of taxation.
QUICK CUTS: ABACAN RESOURCE CORP. (Nasdaq: ABACF) plunged $3 9/16 to $2 1/4 after warning that it sees lower-than-expected cash flow in 1997 and 1998 due to costs and oil prices and that it will not go ahead with a planned bond offering... Newly public LHS GROUP (Nasdaq: LHSG) lost $5 1/2 to $39 on light volume. The telecom billing software provider didn't give any internal reason for the drop... Medical diagnostic products company BIOSOURCE INTERNATIONAL (Nasdaq: BIOI) slid $1 1/8 to $6 3/4 after pre-announcing lower-than-expected Q2 earnings and revenues due to foreign exchange weakness... UROCOR INC. (Nasdaq: UCOR) declined $1 to $8 1/2 after the company said it expects delays in the regulatory approval process for a bladder cancer treatment... Oilfield equipment manufacturer NATIONAL OILWELL (NYSE: NOI) fell $3 to $50 1/2 on a Robinson-Humphrey rating downgrade to "short-term market perform" from "buy."
FOOL ON THE
HILL
An Investment Opinion by Randy
Befumo
The Tangled Webs We Weave
Cable investors got a jolt today after MICROSOFT CORP. (Nasdaq: MSFT)
announced it would invest $1 billion into communications concern COMCAST
CORP. (Nasdaq: CMCSK). Class A Special shares soared $2 15/16 to $21
3/8, while the Class A shares with voting power (CMCSA) jumped $3 3/16 to
$21 7/16. Until recently, cable providers like Comcast have been viewed as
cash-consuming pariahs doomed to slowing growth as digital broadcast satellite
(DBS) providers like DirectTV, Primestar and US SATELLITE BROADCASTING
(Nasdaq: USSB) began to assault their customer base. Industry giant
TELE-COMMUNICATIONS INC. (Nasdaq: TCOMA), commonly known as TCI, traded
at its 12-month of $10 3/4 as recently as early April on continued confusion
over its long-term plans.
Microsoft's billion dollar Comcast investment is almost the reverse of TCI's
aborted $500 investment in the Microsoft Network, scrubbed in November of
1996. For $1 billion in cash, Microsoft gets $500 million worth of the voteless
Class A Special shares and $500 million worth of 5.25% bonds convertible
in super-voting Class B shares in seven years -- shares that would give Microsoft
voting control over Comcast. In return, Comcast gets to use Microsoft's money
to enhance its cable network to allow it to handle high-speed data and video
services. Not only does Microsoft own a chunk of Comcast's 4.3 million cable
subscribers, but it could also potentially benefit from the company's cellular
business, its 57% interest in home-shopping channel QVC, its 68.8% ownership
of E! Entertainment, and its two Philadelphia sports teams.
For its part, Microsoft Chairman Bill Gates stated that Microsoft chose Comcast
because of its "integrated approach to cable distribution, programming and
telecommunications." Gates will now work closely with Comcast President Brian
Roberts to create a mutually beneficial long-term strategy that shepherds
the convergence of conventional television and the desktop personal computer
into a single home entertainment application. Whether some of Comcast's other
assets might contribute to Microsoft's future remains to be seen. The fact
that the conversion of the preferred shares by Microsoft would give it majority
control of Comcast leaves one to wonder if this Comcast stake is Microsoft's
way of hedging its Web TV bet.
With the fourth largest base of cable subscribers in the country, Comcast
makes a decent strategic partner for Microsoft.
Its cable system is concentrated in the densely populated
Northeast, and the company is already working with a consortium of cable
providers on another high-bandwidth cable to computer application -- the
@Home Network. With Microsoft
conspicuously absent from the group behind @Home, it is not known whether
it plans on creating a cable-based service network similar to the Web-based
Microsoft Network (MSN). Microsoft's investment in Comcast mirrors investments
by Intel's media group in technologies that enable the delivery of broadband
media as well as entertainment sites like CNET (Nasdaq: CNWK) that
want to provide
high-bandwidth video applications.
The key difference between the media investments of Intel and Microsoft is
that where Intel just seems to be funding other businesses while concentrating
on its core business, Microsoft is continually becoming embroiled in media
businesses that are hardly rousing successes. Both approaches make strategic
sense, though. For both companies to increase the size of their respective
markets, transforming the PC into a device that consumers can use for viewing
entertainment as well as doing business is critical. However, video requires
a massive amount of bandwidth and is unfeasible over telephone lines without
some sort of amplifying technology like asymmetric digital subscriber line
(ADSL) or integrated digital services network (ISDN). Rather than trying
to convince the consumer to buy some new technology, Microsoft has decided
to focus on the cable boxes already in millions of homes as the quickest
way to deliver high-bandwidth entertainment to the personal computer.
Microsoft's sudden interest in cable television properties caused many investors
to reconsider the intrinsic value of these media properties today. ADELPHIA
COMMUNICATIONS (Nasdaq: ADLAC) rose $1 1/4 to $7 9/16; COX
COMMUNICATIONS (NYSE: COX) climbed $1 7/8 to $24 5/8; U.S. WEST MEDIA
GROUP (NYSE: UMG) jumped $1 3/4 to $21 7/8; and JONES INTERCABLE
(Nasdaq: JOIN) skipped up $1 1/4 to $12 5/8. Further news that TCI had acquired
33% of CABLEVISION (NYSE: CVC) in return for ten New York-based cable
systems helped propel Cablevision shares up $9 3/4 to $44 3/8. For its part,
TCI jumped $1 to $16 1/6, well above the $10 3/4 low the company set when
days seemed darkest for the entire cable industry. Perhaps investors will
be blessed again with another round of panic about cable stocks only to be
again followed by a round of exuberance when another business actually properly
values the cable in the ground and existing customer base.
CONFERENCE CALLS
MICROSOFT (Nasdaq: MSFT), COMCAST (Nasdaq: CMCSA)
To Discuss Microsoft's investment in Comcast
(800) 388-4950
Available through June 13
BOEING BUSINESS JETS (A joint venture between GE and BA)
(News conference for major business announcement)
(800) 633-8284 (code: 2815407) -- replay from 8:00 p.m. EDT
06/11/97 (Wednesday)
VERITAS DGC INC. (NYSE: VTS)
11:00 a.m. EDT
(800) 683-1535 -- live
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