Snippet from SSB 10/5:
OWNERSHIP OF ASIA GLOBAL CROSSING
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Economic Interest Voting Percentage
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Global Crossing 58.8% 65.8%
Microsoft 14.7% 16.4%
Softbank 14.7% 16.4%
Strategic Investors 3.4% 0.4%
Public 8.4% 0.9%
TOTAL 100.0% 100.0%
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Source: Company
AX holders have the following options:
1. Sell down holdings in AX in the current downward spiral of equity
destruction of both GX and AX. This equity destruction is expected to
continue for a few more days from here, as GX was removed from the S&P
500 and S&P 100 yesterday. Our U.S. colleagues estimate that another 78
million share of GX are up for sale in the next few days as indexed
investors re-adjust their portfolios. We do not expect AX to stay steady
while GX heads further south. So chances are that AX holders will
recover even less of their investment if they sell down right away.
Selling down immediately poses one more problem for larger minority
shareholders of AX. The average daily trading volume of AX shares is
small - 194,000 shares for the last three months. If a large holder
starts dumping stock right now (if it can), the investor would only
accelerate its own equity destruction. Furthermore, if the stock falls
below $1 for over 30 days, AX runs the risk of being de-listed form the
NYSE. This is not an optimal solution in our minds.
2. The other option is to hold on. This option is our preference on two
counts. First, after the market is done with reacting to the S&P news
and both GX and AX have taken the worst hits, there is a probability of
stability and maybe recovery too. Second, the investors get the
opportunity to consider the terms of the merger as they come out.
While we believe that it is too early in the day to guess what the terms
could be, we also believe that there will be some form of compensation to
the minority shareholders for the elimination of the pure play that AX
was. The recent transaction of Tyco buying out the minority shareholders
of Tycom at a 48% premium to the trading price is one benchmark to
consider.
We also believe that the chances are higher that the compensation would
be in shares rather than in cash. The question AX holders have to ask
themselves is would they rather hold GX shares? Our guess is that most
AX holders would prefer not to. This means that if investors decide to
take on the offer, their next step would be to sell those GX shares as
and when they can and recover their equivalent AX value. It is not
possible for us to gauge the real value that AX holders could receive,
but it would only be reasonable to say that the value would be somewhere
in between where the stock would be trading on the offer date and the
premium investors receive in the form of GX shares.
OPINION AND RECOMMENDATION
As with the Asian investors who invested in AX over the last year, our
positive view of AX was driven by the growth prospects of this pure play,
not to mention the zealous term that successfully exploited this
opportunity. However, if the merger were to go through, other global and
non-Asia specific issues and risks would dilute the Asian opportunity.
We do believe that AX would continue to drive value -- just not in its
current legal form.
Considering the fundamentals of the business, one could argue in favor of
a substantially higher price target of AX than what it is trading at.
But the uncertainty on the terms of the merger makes that argument less
relevant for the time being. With the view that there would be
compensation for the elimination of the pure play, yet also accounting
for further downside in the immediate term, we believe that AX deserves a
Neutral rating. This rating however, is accompanied by a Speculative
risk rating as opposed to the Medium one we had in the past.
Accordingly, we are downgrading AX to a Neutral (3S) from a Buy (1M) |
