Monday, December 22, 1997
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A "recapitalization" refers to a change in a copmpany's long-term financing mix. In the case of communications test equipment firm Dynatech Corp. (NYSE: DYT), up $10 3/16 to $46 15/16 today, the recapitalization comes in the form of a bid to take the company private in a management-led buyout. Dynatech management and a fund run by Clayton, Dubilier & Rice, Inc. (CD&R) today offered shareholders $47.75 per share in cash along with an aggregate 5.3% fully diluted equity interest in the recapitalized company (which comes out to $49 per share). After completion of the buyout, 300 Dynatech executives will hold a 25% fully diluted stake in the firm, CD&R will hold approximately 70%, and the balance will go to public shareholders. Dynatech makes testing equipment that is used to install and maintain data networks. The management group is paying roughly 27 times trailing earnings for the firm, which is not an extraordinary premium to the how the market currently values the company at 26 times earnings. The company slipped recently after Q2 earnings missed EPS estimates by $0.02. This coupled with a lackluster year provided management with an opportunity to take out an estimated 21% compound average gainer.

Allegheny Teledyne (NYSE: ALT) Chairman Richard Simmons told the Pittsburgh Post-Gazette last Friday that Allegheny had no interest in purchasing the stainless steel operations of Lukens Inc. (NYSE: LUC) after Lukens completed its merger with Bethlehem Steel Corp. (NYSE: BS). This morning the veracity of that statement was confirmed after Allegheny proposed a $28 per share buyout offer for all of Lukens, trumping Bethlehem's $25 cash offer by 12%, which boosted Lukens' shares $4 1/2 to $28 1/2. If the $715 million (including debt) deal is consummated, Allegheny plans to keep Lukens' profitable carbon and stainless plate division and sell the rest of the company. For those who remember the former Allegheny Ludlum Corp., which acquired the Teledyne portion of its name from a merger with aerospace and consumer products company Teledyne Inc., this acquisition seems to be a move in the wrong direction. The merger with Teledyne, as well as the recently announced merger with Oregon Metallurgical (Nasdaq: OREM), were both ostensibly attempts by Allegheny to focus on the high profit specialty metals and consumer products businesses, diversifying its income streams and reducing the volatility associated with the cyclical elements of the steel business.

A number of proposed business combinations dotted the financial landscape today. Electric utility Central and South West Corp. (NYSE: CSR), charged ahead $1 1/8 to $27 1/8 after agreeing to merge with American Electric Power Co. (NYSE: AEP) in a deal that will exchange 0.6 shares of American for each share of Central. The merger would create a $28.1 billion company (market cap) serving more than 4.6 million customers in 11 states. Manufacturer and distributor of steel storage pressure tanks Chemi-Trol Chemical Co. (Nasdaq: CTRL) gained $6 1/2 to $20 1/2 after announcing that it has agreed to be acquired by industrial services and manufacturing company Harsco Corp. (NYSE: HSC) for roughly $46 million, or $23 per share. Essex County Gas Co. (Nasdaq: ECGC) rose $7 to $46 on agreeing to merge with New England's largest distributor of natural gas, Eastern Enterprises (NYSE: EFU). One share of Essex stock will be exchanged for approximately 1.184 shares of Eastern Enterprises stock in the deal, which has an total equity value of roughly $80.5 million, or around $49.72 per share.

Investors may be bummed out about the prospects for regular retail sales, but online retail sales sure have their attention. Shares of Onsale (Nasdaq: ONSL) jumped $1 1/16 to $14 9/16 when the Web-based closeout retailer reported third quarter sales of $32.3 million versus $9.2 million last year. The company is not the online retailer experiencing strong sales growth. Jupiter Communications estimates that online sales will reach $2.6 billion this year, up from $706 million in 1996., an Internet retailers trade group, reported anecdotal evidence of exploding online sales and projected that it would be able to track online sales quarterly by late 1998. Other online retail sales bloomers include (Nasdaq: AMZN) up $2 3/8 to $56 3/8, America Online (NYSE: AOL) rising $5 1/8 to $89 7/8, Dell Computer (Nasdaq: DELL) adding $3 5/16 to $81 5/8, Yahoo! (Nasdaq: YHOO) powering ahead $2 9/16 to $64 7/16, Lycos (Nasdaq: LCOS) up $1 3/8 to $38 1/8, and Excite (Nasdaq: XCIT) jumped $1 1/32 to $26.

There were a few interesting instances of mathematical dissonance today. Corrections Corp. (NYSE: CXC) jumped $7/8 to $33 5/8, adding $74 million in market cap after it said it will build a facility that would product $22 million a year in revenues. GenRad (NYSE: GEN) climbed $2 3/16 to $27, or $56 million, after getting an order from Sun Microsystems (Nasdaq: SUNW) that it valued at all of $1 million. National Data Corp. (NYSE: NDC) rose $1 1/8 to $34 1/8, or about 4.0%, after saying it would buy back 200,000 shares, or 0.75% of its outstanding shares. The best one was Parametric Technology (Nasdaq: PMTC), which jumped $4 1/4 to $45 11/16, or $541.3 million, after the computer aided design software developer said it had received orders from Bang & Olufsen A/S of Denmark for $1.2 million after getting a $1.5 million order from FCI of Paris, France on Friday. After gaining more than half a billion dollars on a few million dollars in orders, one hopes the follow-on order potential here is high.

QUICK TAKES: Merrill Lynch raised its long-term rating on biotechnology company Centocor Inc. (Nasdaq: CNTO) to "buy" from "accumulate," which boosted shares of the company $2 1/8 to $34... Capital One Financial Corp. (NYSE: COF) rose $1 13/16 to $50 1/4 after the financial services and credit card company announced that it expects earnings to exceed analysts' expectations for the fourth quarter of 1997 and the year ending December 31, 1997... Shares of scrap recycler Metal Management (Nasdaq: MTLM) rose $2 5/8 to $17 5/8 for what could be a number of reasons. Kentucky Electric Steel (Nasdaq: KESI) disclosed Friday that its quarterly results would be hurt by higher prices for scrap metal, which directly benefits Metal Management, and super-investor Sam Zell bought about 1.5 million shares for $25 million in cash plus warrants to purchase another 400,000 shares at $20 and another 200,000 at $23.

Geron Corp. (Nasdaq: GERN) announced that it has formed a collaboration with Boehringer Mannheim, GmbH to develop and commercialize research and clinical applications for Geron's methods of detecting and measuring telomerase, a protein whose presence correlates highly with the presence of cancer. Geron shares climbed $7/16 to $9 on the news... Unseasonably good weather and higher-than-expected revenue per available seat mile sent shares of SkyWest, Inc. (Nasdaq: SKYW) soaring $1 15/16 to $27 3/4. The holding company for SkyWest Airlines announced that as a result of these favorable developments, Q3 EPS would be between $0.37 to $0.42 versus prior expectations of $0.13... After completing its initial public offering on Friday of 4.6 million shares of common stock at $19.75 per share, Coinmach Laundry Corp. (Nasdaq: WDRY) rose $2 5/8 to $24 3/4 today after the supplier of coin-operated laundry equipment services was rated a "strong buy" at BT Alex. Brown.

Aavid Thermal Technologies (Nasdaq: AATT) added $2 to $24 3/4 after announcing late Friday that it had completed an expansion of its manufacturing capacity, adding a 40,000 square foot manufacturing facility in China. The company also announced the closing of additional financing "in order to meet the increasing demand for its products and services"... Designer and manufacturer of precision timing and frequency products Datum Inc. (Nasdaq: DATM) jumped $2 7/16 to 16 3/16 after receiving an upgrade from Rodman & Renshaw to "buy" from "neutral"... Hotel operator Prime Hospitality Corp. (NYSE: PDQ) rose $1 1/2 to $18 after its directors approved a plan to repurchase up to one million shares of its common stock... Hambrecht and Quist analyst Rob Faulkner issued a "strong buy" recommendation on medical device maker Guidant Corp. (NYSE: GDT), which rose $4 1/2 to $58 5/8 .

Pacific Scientific Co. (NYSE: PSX) gained $1 3/4 to $23 7/16 after its board voted unanimously to reject the $20.50 per share takeover offer from a subsidiary of Kollmorgen Corp. (NYSE: KOL)... R.P. Scherer Corp. (NYSE: SHR) climbed $3 3/4 to $60 11/16 after it announced that diagnostic test manufacturer Oxoid Ltd. has launched a new Salmonella test kit that uses Scherer's "timed-release capsule" technology... Sugar concern Imperial Holly Corp. (Amex: IHK) completed its acquisition of Savannah Foods & Industries (NYSE: SFI), which rose $1 1/8 to $18 7/8... Gaining some "legitimacy" today was UOL Publishing (Nasdaq: UOLP), a publisher of interactive and on-demand Web-based courseware for the corporate training and education market, which gained $1 15/16 to $14 7/16 after establishing a $6.0 million credit facility with First Union National Bank... Shares of Onyx Pharmaceuticals (Nasdaq: ONXX) rose $1 3/16 to $8 7/16 after the company' s new cancer drug Onyx-015 began Phase II Trials.


Worries about slow holiday sales continued to hit the shares of various retailers today. Possible perilous PC sales had CompUSA (NYSE: CPU) down $1 to $27. Jitters on jolly joy-joy toy sales saw shares of off-price retailer Consolidated Stores (NYSE: CNS) slip $1 1/2 to $41 1/2. Teen clothing emporium Gadzooks (Nasdaq: GADZ) was squashed for $2 to $21 1/4 on no news. Some investors had claimed that institutions fleeing PC-related companies went to retailers as a safe haven only to discover that retail sales aren't necessarily that great. Whatever the reason, retail investors have had a tough two weeks.

Xionics Document Technologies (Nasdaq: XION) faded $6 9/32 to $3 19/32 after the company warned it would only make $0.02 per share in its upcoming quarter. Xionics stated that it had changed its license fees for its proprietary embedded digital publishing technology used by almost a dozen copier, printer, and scanner companies to create integrated copier-printer-faxes. Although the company pointed the finger at East Asian economic uncertainty, the fact that the disappointment comes so soon after peer Electronics for Imaging (Nasdaq: EFII) was toasted and office equipment vendors like Danka Business Solutions (Nasdaq: DANKY) began to report problems, one has to wonder whether poor demand for office equipment is the real problem. Competitor Peerless Systems (Nasdaq: PRLS) was down $1 13/16 to $12 1/16 in sympathy, while printer manufacturer Encad (Nasdaq: ENCD) was down $1 7/8 to $25 1/8 as well.

QUICK CUTS: American Skiing (NYSE: SKI) was snowed under for $15/16 to $14 1/4 after reporting a much larger-than-expected fiscal first quarter loss of $1.55 per share on fifteen times as many shares as last year... Software company Broderbund (Nasdaq: BROD) was hit for $1 7/16 to $26 13/16 after CIBC Oppenheimer downgraded the shares from "outperform" to "hold," catching anyone attempting to benefit from the recently released Riven to question what had appeared to be a solid trade... Digital Link (Nasdaq: DLNK) was nailed for $2 7/8 to $9 7/8 when the manufacturer of high-speed digital access gear warned it would lose $0.05 to $0.07 per share in its upcoming quarter instead of making $0.20 per share as analysts' had predicted.

General Datacomm (NYSE: GDC) tumbled $3/4 to $4 after Merrill Lynch's Joseph Bellae cut his long-term rating to "neutral" from "attractive"... Kentucky Electric Steel (Nasdaq: KESI) dropped $3/4 to $4 3/4 after the steel minimill warned that it would post break-even results due to higher prices for scrap metal... Japanese agricultural equipment manufacturer Kubota (NYSE: KUB) was dumped for $8 1/4 to $53 1/4 after earnings estimates were apparently cut in Japan overnight... Libbey Inc. (NYSE: LBY) fell $3 11/16 to $37 1/8 after Salomon Smith Barney cut the company to "neutral" from "outperform" only two trading days after analyst Donald Zwyer cut the stock from "buy" to "outperform." We guess the $45 price target he had on December 18 no longer applies...

NeoPharm (AMEX: NEO) dropped $2 3/8 to $4 after a Food and Drug Administration advisory panel said the biopharmaceutical company had not proven that its Neomark breast-cancer tumor test was better than existing tests... Penford Corp. (Nasdaq: PENX) was knocked down $4 3/8 to $31 1/8 after the diversified industrial concern reported fiscal first quarter earnings of $0.07 per share, well below the $0.23 that analysts were expecting... Physician Resource Group (NYSE: PRG) lost $9/16 to $4 after Friday's resignation of the Chief Financial Officer and two members of the Board of Directors.

An Investment Opinion by Randy Befumo

Checks in the Mail for Artistic Greetings

In a fairly complicated merger agreement announced today, MDC Communications (AMEX: MDQ) is acquiring the check business of Artistic Greetings (Nasdaq: ARTG) for $5.70 per share in cash. Unfortunately for shareholders of MDC Communications, at first glance it appears that Artistic Greetings is getting the better part of the deal as it dumps its dying personalized check business for cash and takes the rest of the personalized products company private at a bargain price. Just as other check giants such as Deluxe Corp. (NYSE: DLX) and John Harland (NYSE: JH) are struggling to cut costs in their check divisions while they diversify into electronic payments, MDC Communications is taking on debt to purchase a check business.

MDC Communications is paying $33 million in cash to get Artistic's personalized check business, which generated approximately $45 million of its $96.7 million in trailing sales. The rest of Artistic will be bought in a separate cash transaction that will consist of MDC's new unit getting $9 million in cash and losing liabilities related to the other Artistic Greetings businesses. How much of Artistic's $2.1 million in cash and securities or $5.0 million in long-term debt will stay with the check business is unknown, but at most this would only add a million or two to the effective purchase price for the division. With Artistic's 6 million boxes of checks per year under its belt, MDC vaults into the number two position in the North American check market and should generate $80 million in revenues next year.

The only problem is that the credit card is killing the check in North America. Despite MDC's claim in its press release that checks are a "rapidly growing industry," the volume of purchases by checks has been going down for years as more and more everyday purchases are consummated with credit or debit cards. It is hard to believe that the printed check business is going strong when Deluxe Corp. has closed 26 of its 41 check printing plants and John Harland has shut down more than 20 of its 40 plants. Although doing this deal at what looks to be around 0.75 times trailing sales is not exactly overpaying, given that the major check manufacturers in North America have suffered years of decline, it is hard to imagine why any company would jump in the business and proclaim it rapidly growing. While it should generate a ton of cash that might be invested in building other businesses, as both Deluxe and John Harland have done over the past few years, to paint it as a source of growth seems a tad misleading.

A quick check of MDC's financial statements on Canada's SEDAR (the equivalent of EDGAR) reveals that after paying out the $33 million, MDC's balance sheet will either be bereft of cash or show a significant addition to the already hefty $200 million in debt the company carries. Although 1997 sales of $76.4 million will be substantially expanded to around $121.4 million by the merger, the resulting highly leverage company will have an enterprise value-to-sales ratio of approximately 1.4, operating margins of around 10%, cash flow margins of 5%, and profits almost completely eaten up by debt servicing and non-cash amortization and depreciation. Still, the price MDC is paying for Artistic's business is at a discount to its own valuation, making the pending deal accretive.

MDC's business strategy seems pretty well aligned with that of Deluxe Corp., which has substantial plastic card minting operations in addition to the check business. But Deluxe also has a direct marketing division for financial institutions, a third-party processing business for ATMs, and a specialized business forms and personalized paper products business that is not all that much different from the part of Artistic Greetings that is being taken private by its former Chief Executive. Despite the well-rounded attempts at diversification, both Deluxe and John Harland have had average annual returns of only 4.3% to 4.9% (with dividends reinvested) over the past seven years where the S&P 500 has returned 19.7%. No matter how you slice it, MDC Communications' strategy here seems strange considering that checks are obviously a dying business -- regardless of the fact that a case could be that direct mail checks are taking share from financial institution checks. It will be interesting to see if MDC's investment in a bad business pays off, even at this meager valuation.


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