[Potential Suitors For Tel-Save Subject Of Debate Among Analysts]
NEW YORK -(Dow Jones)- Tel-Save Holdings Inc., a reseller of long-distance phone service that has put itself up for sale, will likely be acquired by a large or medium-size long-distance company but analysts are hard pressed to come up with a specific suitor.
Tel-Save provides long-distance service to small- and medium-size businesses but is best known for its recent push into the consumer market via a high-profile marketing deal with America Online Inc., the nation's largest computer on-line service.
In the AOL campaign, New Hope, Pa.-based Tel-Save offers nine-cents-a-minute rates to consumers. Bear Stearns & Co. analyst James Henry believes Tel-Save can pick up one million subscribers this year from the effort and that the AOL deal could drive growth by $2 a share by 1999.
Recent talk suggests telecom giants such as AT&T Corp. or GTE Corp. could be potential buyers. Smaller firms, including LCI International Inc. or Qwest Communications International Inc., have also been mentioned.
"AT&T would make a lot of sense," said BancAmerica Robertson Stephens analyst Timothy Horan. The AOL campaign might prove "a very effective way for AT&T to retain customers (and) sell local-exchange and wireless" services.
Henry suggested that Tel-Save, which has a market capitalization of approximately $1.8 billion, could draw an offer of $40 to $45 a share from a large long-distance provider, or $35 to $40 a share in a merger of equals. The company's Nasdaq-listed shares were trading at around $28 Monday.
Most analysts agree that Tel-Save's attractiveness is largely a product of its AOL deal. "In light of that success, I would suspect that there is probably a significant opportunity to leverage that distribution medium even further," said Stuart Conrad, an analyst with Deutsche Morgan Grenfell Inc.
"What Tel-Save offers cannot be easily duplicated," he added, "and that is a function of the scale of AOL and a function of the uniqueness of the deal they've struck with AOL."
Tel-Save Friday said it hired Salomon Smith Barney to advise it on the possible sale of the company and has talked with "a number" of potential suitors. The company late last year was rebuffed twice by companies it sought to acquire. Fellow long-distance carrier ACC Corp. spurned Tel-Save's bid and agreed instead to be acquired by Teleport Communications Group Inc. in a $1 billion deal. And local-phone company Shared Technologies Fairchild Inc. rejected Tel-Save's $511 million offer, selling instead to Intermedia Communications Inc. in a deal valued at $640 million.
Some analysts speculated that Tel-Save's bids for ACC and Shared were an attempt to bolster its holdings in the hope of attracting a buyer of its own. A few weeks ago, Borislow spoke of a "belief that the company must either be or become part of a larger organization." Tel-Save recently announced plans to buy Symetrics Industries Inc., a maker of phone-network switches, and Compco Inc., which develops communications software, in small deals.
In recent weeks, Tel-Save has touted the results of its marketing pitch to AOL customers. AOL users are greeted by a pop-up box when they log onto the service. Words in large fonts trumpet the nine-cents-a-minute rate for phone calls and offer customers more information. Even if users declined the offer, they are given information on how to re-examine it at a later time.
AOL members who sign up for the offer receive detailed billing information on-line and pay for their long-distance service with a credit card. Tel-Save has said the electronic billing and credit-card payment will allow it to save as much as 30% of its costs and thereby offer customers big savings.
Tel-Save has been very aggressive in advertising, adding more print and radio efforts in addition to the AOL deal. The AOL offering is advertised by popular radio personality Howard Stern. The AOL deal granted AOL rights to aquire as much as an 18% stake in Tel-Save.
Tel-Save has not been without its critics. When it reported fourth-quarter results earlier this month, the company didn't disclose year-ago results in its press release. Tel-Save also came under fire from some market watchers last year soon after it struck the deal with AOL. A $110 million payment to AOL represented an advance on the commissions Tel-Save would owe AOL on the long-distance recruits it signs up.
Instead of writing off part of the payment as an expense in the first quarter, Tel-Save decided to write it off over a 40-year period. If it had written it off in the first quarter of last year, its earnings would have missed analyst estimates instead of topping the call. Tel-Save later restated its first-quarter earnings to include a write-off related to the AOL payment and took additional write-offs for the rest of the year.
For 1997, Tel-Save posted a net loss of $20.9 million, or 33 cents a share on a fully diluted basis, compared with net income of $20.2 million, or 35 cents a diluted share, in 1996. Revenue increased 31% to $304.8 million. |
