HFS , CUC shrs off on growth fears -- arbs
Reuters Story - May 28, 1997 16:06
NEW YORK, May 28 (Reuter) - Shares in merger partners HFS
Inc and CUC International Inc tumbled following the unveiling
of their nearly-$11 billion deal as investors fretted over the
resulting company's future growth rates, arbitrageurs said.
"Anytime you have two companies with strong growth tracks
merging, there is a concern that the growth rates are
unsustainable because you are creating a behemoth," said an arb
who declined to be identified.
"There are no cost savings here, though they have huge
cross-sale and revenue enhancement opportunities, but it is
going to take some putting together," he said.
The arbitrageurs agreed the sales were not driven by
apprehesion or doubt about the terms or rationale of the deal,
but largely by concerns about whether the high growth rates
posted by the companies can be sustained.
In late-session New York Stock Exchange trading, HFS shares
were off 4-1/8, or seven percent, to 54-3/8 with over four
million shares traded, while CUC shed 2-3/4, or 10.6 percent,
to 23-1/4.
CUC was the exchange's most active issue with more than 10
million shares traded and HFS ranked tenth among the NYSE's
busiest shares.
A second arbitrageur, who also requested anonymity, said
the companies' executives delivered a "mediocre presentation"
to the financial community at a Manhattan hotel earlier today.
"It was just fatigue," he said.
Also, securities analysts are taking cautious views
regarding the merged company's growth potential because, "no
analyst who covers CUC covers HFS and vice versa," he said.
"This is not dissimilar from the Aetna Inc /U.S.
Healthcare and WorldCom /MFS (Communications) deals,"
where the stocks fell after the deals were announced.
What these deals have in common is analysts' conservatism
while they become familiar with the company that was previously
uncovered, the second arbitrageur said.
In a telephone interview with Reuters after the stock-swap
merger was announced last night, HFS chairman Henry Silverman
said, "These two companies have been shareholder-value
machines. This transaction ensures that machine can (continue
building) shareholder value for years to come. It is about the
sustainability of the earnings growth."
In the same interview, CUC chairman Walter Forbes said the
company's growth rates are "pretty similar."
Last week, Silverman told a group of financial journalists
that per-share earnings growth of 25 to 30 percent per year is
"achievable."
The first arbitrageur also said, "You are seeing some of
the momentum players leave. But on the other hand, it is a
company with a huge market cap that investors cannot ignore."
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Notice this refers to analysts being conservative. They'd rather shoot first, and upgrade later. This imbalance presents buying opportunities to smart investors.
For an extreme version of this, look at the COMS/USRX merger. USRX was at $68 3 months ago, and after the merger announcement, it proceeded to get dragged down by COMS, all the way down to $40. Today, USRX is $88.
Todd |
