XTON write up is awesome:::
Executone moves toward eLottery
Internet spinoffs power several companies
By Thom Calandra, CBS MarketWatch
Last Update: 5:40 PM ET Jan 26, 1999Calandra on Evening News
SAN FRANCISCO (CBS.MW) -- While the whole world is watching an Internet spinoff by Compaq Computer (CPQ) Tuesday, one fund manager has another Web breakup on his mind.
San Francisco fund manager Andrew Shapiro chases bargain stocks, and he thinks he has one in Executone, a phone systems company that is spreading its wings over the Internet. And lottery gambling.
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Shapiro, president of Lawndale Capital Management in San Francisco, owns 7.5 percent of Executone (XTON), which just filed an amended S-1 with the Securities & Exchange Commission. The filing and approval from the company's preferred shareholders allows the Connecticut company to create a new eLottery company that will trade on Nasdaq.
Shapiro, an activist who specializes in small-company shares, manages $15 million of investors' money. In Executone, he sees a chance to own a stodgy old company that makes about $140 million of yearly sales in the areas of phones, acute-care call centers for nurses and other voice and voice-data systems.
What the fund manager gets after the break-up, as all shareholders will, is stock in eLottery, which hopes to transform legal gambling by offering lottery tickets via the Internet and through phone connections. See the spinoff statement.
"We feel the health-care and the computer telephony business," Shapiro says about Executone's existing businesses, "are worth $3 to $5 a share." Executone shares on Nasdaq sell for 2 1/2, giving the company a market capitalization of $125 million.
"I have the Internet lottery business as a free call option," he says. Shapiro hopes other investors feel the same way. Executone in its revised S-1 filing, says "lotteries are operated by state and foreign governmental authorities and their licensees in approximately 200 jurisdictions worldwide. Worldwide lottery ticket sales in 1997 were approximately $116.6 billion.
In the United States, 38 lotteries offering traditional draw games and 39 lotteries sell instant tickets, the company's filing says. "You have a lottery market of approximately $110 billion around the world; that's bigger than Amazon.com's book-selling market of $85 billion," says Shapiro.
Shapiro is a patient man. He takes stakes in small companies and holds the stakes for years. The fund manager owns 5 percent or greater positions in Quality Systems (QSII), Craig Corp. Class A shares (CRG) and P& F Industries (PFINA). "All my investments are bought at deep discounts to their underlying asset values, often at very low multiples to book or cash flow," he says.
Executone's present state of affairs evolved over a decade or so of leveraged mergers and shifting business models. Sales fell steadily as the company became less of a direct seller of phone and intercom systems and more of a seller to wholesale distributors.
This latest makeover comes after the company bought the assets of UniStar Gaming Corp., which has the rights to develop and manage the Indian National Lottery, and renamed the unit eLottery. The Indian Lottery business will not be a part of eLottery.
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The Connecticut company will use investment bank Jefferies & Co. Inc. to assist it in the proposed spinoff. A Jefferies appraisal of the company could help eLottery to secure the proper Nasdaq listing.
Shapiro says "lottery revenues at the state level have become stagnant" and that an Internet lottery will boost sales. "This is a business model that is meant to be profitable early on," he says.
Shapiro says a new "turnaround manager," Stanley Kabala, is now Executone's CEO. Robert Berman, who heads a company with Internet operations called Hospitality Worldwide Services (HWS), will come in to chair eLottery.
The eLottery spinoff will distribute one share of the new company for every five Executone shares. When all is said and done, approximately 11.7 million eLottery shares will be available. Holders of Executone preferred stock will get 15 percent of the outstanding shares of eLottery common stock and all the shares of eLottery's cumulative convertible preferred Stock, series A.
Compaq's move to break out its Alta Vista search engine business as a standalone company might give smaller Web spinoffs such as Executone's eLottery a boost. A wave of companies large and small, including Navarre Corp. (NAVR) and Delia's (DLIA), have unveiled plans to separate Internet units from existing businesses and sell the freshly scrubbed shares to an eager public. See related story.
Sometimes, investors have to be patient, even after a company signals an intention to spin off Internet operations. IDT Corp. (IDTC), we reported Monday in this column, had talked about launching an initial public offering of its Internet telephony operations. Yet the long-distance phone company's shares, amod flagging earnings, have sagged this past year -- until Tuesday.
IDT shares rose 2 13/32 to 14 7/16 Tuesday. The New Jersey company's Net2Phone Direct just won 1998 Product of the Year award from Internet Telephony magazine.
Fund manager Shapiro is counting on his patience. Executone shares Tuesday actually fell 1/32 to 2/12 in the wake of its Internet spinoff news.
Shapiro says the lesser-known eLottery, using technology it says is not available in the lottery business, will have to prove its business model. "We viewed this as a free call option on an Internet company where we weren't paying for any expectations," says Shapiro, whose notion of value prevents him from buying high-flying Web stocks like Amazon.com.
EARLY WORD: Facing the threat of federal lawsuits, executives at Philip Morris (MO) soon will float the idea of a food business spinoff, investment professionals say. The tobacco company's spinoff could create one of the world's largest publicly traded food companies. The U.S. Justice Department says it intends to file a multibillion suit against U.S. tobacco companies to cover health-care costs. The tobacco and food company's board of directors will meet this week.
UPDATE: Hollis-Eden Pharmaceuticals (HEPH), the San Diego AIDS drug developer we wrote about earlier, on Tuesday said it completed a private placement of 719,220 shares of common stock. The company, which hopes to use stem cell therapy to battle AIDS and the HIV virus that causes AIDS, raised approximately $13 million from an investment group led by large stock market investor Capital Research and Management Co. See the original column. <Picture>
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Thom Calandra is CBS MarketWatch's editor-in-chief.
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