Western Resources Tired of POI Dave Marino-Nachison (TMF Braden)
October 8, 1999
Looking to provide earnings-focused investors with increased reliability in its results, Kansas utility Western Resources (NYSE: WR) today said it's considering alternatives for its 85% ownership in money-losing residential security alarm company Protection One (NYSE: POI).
"Western Resources has experienced some short-term financial challenges with regard to its Protection One investment," said Western Chairman and CEO David Witting, "and those challenges must be managed." Protection One's stock has fallen considerably over the past year, which has taken its toll on Western's returns.
Western's press release listed a host of options, but the one that probably had the most to do with Western's shares rising up more than 10% at times today was a shedding of its Protection One stake. A decision about a possible sale or spin-off is expected to be made by the end of Q1.
Through a variety of operating divisions, subsidiaries, and part ownerships, Western has its hands in electric generation, transmission and distribution services, natural gas transmission and distribution services, and nuclear power. The dynamics of the heavily regulated energy business are, barring catastrophe, generally reliable, which is why you sometimes hear the chestnut about old ladies investing in utilities for the reliable dividend payouts.
Western's energy assets -- which include a 45% interest in Oklahoma natural gas company ONEOK Inc. (NYSE: OKE) -- definitely fit that bill.
That hasn't been the case at Protection One, which through the first six months of 1999 has reported negative cash flow from operating activities. It's had some other bad luck, including an SEC inquiry into the company's financial statements, trouble meeting the covenants of its credit facility, and the cancellation of the acquisition of Lifeline Systems Inc. (Nasdaq: LIFE) after nearly a year because of regulatory problems.
Could Western just try to ride it out and wait for a return on its investment? Sure it could, and Wittig had plenty of nice things to say about Protection One's prospects in its statement. But holding on doesn't seem likely given Wittig's observation that "while the security business generates strong cash flow, it has not generated net income, which is the case with many customer growth-type businesses, [and] many utility investors are interested exclusively in net income, which is incompatible with a growth business."
So Western will stick with what it knows best, freeing up its attention to deal with more pressing matters such as reducing debt and boosting earnings. First and foremost will hopefully be the long-awaited closure of the merger of its electric assets with Kansas City Power & Light (NYSE: KLT), which will create Westar Energy, a new company that will be about 80% owned by Western.
ONEOK, meanwhile, is working to assimilate Southwest Gas Corp. (NYSE: SWX), which agreed to join up for $918 million in cash. This might be another association worth looking at closely as Western could, as noted in a recent First Union Capital Markets research report, conceivably buy out ONEOK, be bought out by ONEOK, or move to create an even larger entity over the next several years.
With today's news, Western signaled a commitment to generating value and earnings on its own terms. Unless you believe the company is missing the boat in getting out of the security business, now might be a good time to consider paying Dorothy a visit.
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