Tuesday, March 9, 1999
DJIA 9788.66 +61.05 (+0.63%) S&P 500 1293.62 +10.89 (+0.85%) Nasdaq 2432.97 +35.35 (+1.47%) Russell 2000 402.36 +2.30 (+0.57%) 30-Year Bond 95 5/32 +3/32 5.58 Yield

An Investment Opinion
by Alex Schay

Conglomerate Up In Smoke?

The ill-fated 15-year-old marriage between Nabisco Brands and R.J. Reynolds looks like it's finally headed for a real split. RJR Nabisco Holdings Corp. (NYSE: RN) announced that it intends to sell its international tobacco business to Japan Tobacco for $8 billion -- $7.8 billion and the assumption of $200 million in debt. Once this transaction is completed -- within two months according to the company -- RJR Nabisco Holdings will spin off its U.S. cigarette business and jettison the "RJR" portion of its name.

In a February 13D filing, it was revealed that long-time break-up agitator Carl Icahn had amassed a 7.7% stake in the firm. Having crossed the 5% threshold last year, Icahn made it clear at the time that he planned on "having a proxy fight if Nabisco is not spun-off before the next annual meeting of Issuer's (RN's) shareholders in order to elect directors who would favorably consider a spin-off of the Nabisco holdings." With the May 12 date looming, many observers still felt that little would be done to meet his demands, due to the fact that major asset sales (Nabisco or International Tobacco) would have significant dilutive impact and tax ramifications (for a domestic tobacco business that has already seen some erosion of market share), and possibly raise litigation concerns related to the "sheltering" of the firm's best assets.

Well, it looks like the price was right on the international business -- roughly $1.8 billion more than most observers had expected. Of course, "unlocking the value" of the food business is an oft-heard chant among followers of tobacco/food conglomerates. The average enterprise-to-EBITDA multiples of the group are around 5-8 times forward numbers. Most other companies that sell consumer staples trade at an average ratio of 10-15 times forward estimates. Say, if Philip Morris were to be afforded the same multiple as comparable consumer staples companies, the capital gains (tax) that would have to be paid on that amount (its new market capitalization) by shareholders would pay the entire federal deficit for more than a year.

However, as any attentive observer can see, roughly 20% of Nabisco is already public, and commands a pretty nice valuation. The problem for RJR is that the tobacco business is looking at EBITDA-to-interest expense coverage of about 3.5 times in 1999, and that's with the inclusion of international operations. RJR has stated that "the deal will enable it strengthen the financial position of Reynolds Tobacco Co." It's more likely the proceeds of the international sale will have to go toward shoring up the domestic operations -- against the threat of litigation, as well as domestic market share erosion.


Web portal company Lycos (Nasdaq: LCOS) jumped $14 1/4 to $98 1/8 after it said it was still fully committed to its planned merger with USA Networks (Nasdaq: USAI) despite the resignation of CMGI (Nasdaq: CMGI) CEO David Weatherell from Lycos' board in protest of the deal's terms -- CMGI is Lycos' largest shareholder. Weatherell told Reuters he will solicit other Lycos shareholders to get a higher price for the sale of Lycos or even block the sale.

Consumer electronics maker Sony Corp. (NYSE: SNE) won $4 15/16 to $90 3/4 following news that it will close 15 factories, reduce its work force by 10%, and raise its stake to 100% in three Japanese subsidiaries -- Sony Music Entertainment (Japan) Inc., Sony Chemical Corp., and Sony Precision Technology Inc. -- as part of a broad consolidation of its global businesses to better respond to the growth of the Internet and other network-driven computer businesses.

Following on the heels of surprising news that Intel (Nasdaq: INTC) and the Federal Trade Commission (FTC) have reached a last-minute settlement of antitrust charges right before the case was scheduled to go to trial today, The Seattle Times is reporting that Microsoft (Nasdaq: MSFT) and the government are also looking for ways to settle the landmark suit against the Redmond, Washington-based software giant before that trial resumes next month after a six-week recess. Microsoft shares added $4 1/2 to $163 1/2 this morning. For more, grab some of today's Breakfast With the Fool.

Direct marketer ValueVision International (Nasdaq: VVTV) added $1 7/8 to $12 after GE Equity and NBC, divisions of General Electric (NYSE: GE), took a 19.9% stake in the company with the intention of increasing ValueVision's cable network distribution and exploring future e-commerce opportunities. The companies paid $56 million for their stake, in the form of preferred stock and warrants, and have an option to boost their share to 39.9%.

Wireless communication and broadcast services company Crown Castle International (Nasdaq: TWRS) towered $1 7/16 to $20 5/16 today after agreeing to buy 1,850 wireless communications towers from BellSouth Corp. (NYSE: BLS) for $610 million. Crown Castle also agreed to a five-year, 500 tower build-to-suit agreement with BellSouth.

Online brokerage E*Trade Group (Nasdaq: EGRP), reportedly started with a "buy" rating by Volpe, Brown & Co., picked up $3 7/8 to $50 1/8.

Wireless communications microwave transmission modules maker REMEC (Nasdaq: REMC) zoomed up $1 1/8 to $19 1/8 after turning in Q4 EPS of $0.09, half of the year-ago number but two cents ahead of First Call's three-analyst consensus estimate.

Personal websites network Go2Net Inc. (Nasdaq: GNET) gained $18 3/8 to $85 1/8 after ING Baring Furman Selz initiated coverage with a "strong buy" rating. The company announced an e-commerce site selling wireless communications devices, co-branded with Wireless Dimension, yesterday morning.

E-commerce services company iMALL Inc. (Nasdaq: IMAL), which announced the purchase of San Francisco Internet payment services company Pure Payments Inc., moved ahead $1 1/16 to $14 7/8. iMALL will issue 450,000 shares of company stock to fund the purchase, valuing Pure Payments at about $6.2 million based on yesterday's closing price.

Furniture maker O'Sullivan Industries Holdings (NYSE: OSU) nailed on $2 1/16 to $12 5/8 after it said it expects fiscal Q3 EPS to come in above $0.40, well ahead of the $0.31 consensus estimate four analysts gave First Call. The company cited manufacturing improvements as a driver of the anticipated windfall.

State and local government consulting firm MAXIMUS Inc. (NYSE: MMS) improved $1 5/16 to $23 5/16 after announcing a five-year $56 million contract to provide managed care enrollment services for Massachusetts' health benefit management program. The contract has two additional option years.

Drug developer Roberts Pharmaceutical Corp. (AMEX: RPC), which agreed to acquire U.K. and Republic of Ireland rights to Lodine, a drug used in treatment of rheumatoid and osteoarthritis, added $1 3/16 to $26 1/8 this morning. For a Foolish look back at Roberts' outstanding 1998, click here. Terms of the deal, from a subsidiary of American Home Products (NYSE: AHP), were not available.

Information technology training software developer CBT Group (Nasdaq: CBTSY) tacked on $1 11/16 to $13 7/16 after Piper Jaffray upgraded its rating on the stock to "buy" from "neutral."

Communications chipsets supplier Conexant Systems (Nasdaq: CNXT) took $1 11/16 to $23 11/16 after Credit Suisse First Boston upgraded the stock to "strong buy" from "buy." The shares moved ahead $3 5/16 yesterday after the company said it will report breakeven fiscal Q2 results and profits in Q3. Analysts surveyed by First Call expected a Q2 loss of $0.03 per share. Semiconductor automatic test equipment maker Credence Systems Corp. (Nasdaq: CMOS), meanwhile, rose $4 1/8 to $22 following an upgrade to "buy" from "hold" at Credit Suisse First Boston.


X86 chip maker Advanced Micro Devices (NYSE: AMD) was slammed $1 7/16 to $17 1/2 after saying design enhancements to its K6-2 processors resulted in lower production yields in fiscal Q1, leading to total shipments during the period about 500,000 units short of the company's stated goal of 5.5 million units. As a result, AMD will report a "significant loss" in the quarter. The firm also said it is laying off 300 workers in an effort to better focus the company.

Real estate investment trust Lexington Corporate Properties Trust (NYSE: LXP) sank $1 5/8 to $9 15/16 after agreeing to defer a portion of the monthly rent that troubled home equity lender FirstPlus Financial Group (NYSE: FP) pays Lexington for its headquarters building in Dallas over the next four months. The deferral will reduce Lexington's quarterly revenue by about $383,000, or $0.15 per share, according to the company.

Contract irradiation and sterilization services provider SteriGenics International (Nasdaq: STER) was zapped $6 1/2 to $10 1/8 after saying lower business volumes in some of its medical sterilization markets will result in fiscal Q4 (ending March 31) EPS between $0.22 and $0.25, short of the Zacks mean estimate of $0.28. PaineWebber lowered its rating to "attractive" from "buy."

Automated call center products designer Periphonics Corp. (Nasdaq: PERI) dropped $2 1/4 to $7 15/16 after pre-announcing fiscal Q3 EPS between $0.09 and $0.11, below the Zacks mean estimate of $0.17. The company said "a number of sizable customer orders" that were expected to close during the quarter were delayed and some will instead close in Q4.

Plastic compounds and resins supplier A. Schulman (Nasdaq: SHLM) slid $1 9/16 to $13 15/16 after saying weakness in Europe and "extremely low" pricing levels will result in fiscal Q2 EPS "somewhat less" than last year's $0.31 and below the $0.33 the company said analysts had been anticipating.

Electronic payment technologies developer Hypercom Corp. (NYSE: HYC) slipped $4 3/16 to $5 9/16 after warning that product shipping delays and depressed economic conditions in Asia and Latin America will lead to a fiscal Q3 loss between $0.06 and $0.09 per share. The three analysts surveyed by First Call had called for earnings of $0.16 per share in the quarter.

Canadian aluminum products producer and marketer Alcan Aluminium (NYSE: AL) was canned for a $13/16 loss to $24 after saying weak prices in Europe and economic woes in Brazil will lead to Q1 net income (before charges) 50% to 60% below the $0.30 per share reported in Q4. The First Call mean estimate had called for earnings of $0.31 per share in the period.

Wisconsin Central Transportation (Nasdaq: WCLX) fell $15/16 to $14 1/16 after Morgan Stanley Dean Witter downgraded the railway operator to "neutral" from "outperform."


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