>From The Wall Street Urinal
teddy.
despite your witty moniker, the urinal appears to have got the gist of it. here are more details fairly succinctly de-legalesed in yesterday's washington post.
cheers,
-chris.
-----
Financial Haute Couture
(Internet Addendum)
By Allan Sloan
Tuesday, May 25, 1999
One of the major problems here is that US West holders have to end up with more value when the US West-Global deal is completed than Global holders get. Calculating all this is complicated by Global's pending purchase of Frontier Corp. The problem is that no one knows how many shares Global will have to issue to buy Frontier. That's because Global has to pay $63 of stock or 1.1095 Global shares, whichever is more, for each share of Frontier. If Global is below $56.78, it will pay more than 1.1095 shares for each Frontier share. If Global falls below $34.56, it has the option of paying 1.8229 shares plus cash to make up the $63, or by issuing enough shares to make the deal worth $63 of stock.
The uncertainty over how many Global shares will be outstanding is why US West and Global say Global will issue approximately 1.2 Global shares for each US West share, rather than giving a fixed ratio. The exact ratio can't be set until after the Frontier deal closes, which is scheduled for this September.
US West's current tender offer for 9.5 percent of Global's stock at a premium price of $62.75 a share is part of this jockeying. USW will buy about 39 million shares from Global holders. That will reduce the number of Global shares outstanding—the shares will be eliminated after the companies combine. By reducing the number of Global shares outstanding, this tender offer allows US West holders to get more Global stock per US West share than they would get if more Global shares were outstanding.
As luck would have it, USW's purchase of Global shares is also a fine deal for Global insiders, who get a chance to sell part of their holdings at a premium price without having to sell shares on the open market, which would depress Global's share price. Even though Global has about 440 million shares outstanding, only about 42 million of them are available for trading. The tender offer will shrink that to about 38 million shares.
Now, to the accounting and tax complications. Accounting first. When a company buys another company for more than the tangible value of the acquired company's assets, it creates an accounting charge called goodwill. Goodwill reduces the acquiring company's reported earnings even though there's no cash outlay involved. Lower reported profits, in theory, hurt the acquirer's share price.
In this deal, having US West buy Global Crossing creates about $30 billion of goodwill. (Having Global buy US West would create about $36 billion of goodwill.) If the new, combined company charges the $30 billion of goodwill to profits over 25 years, as contemplated, reported profits would be reduced $1.2 billion a year: $30 billion divided by 25. A lot of money for a conventional company. But because the combined companies can dump the $30 billion of goodwill into the accounts of its proposed Global G stock, the charge won't matter. That's because G stock is aimed for an audience that values securities not on the basis of reported profits, but on the basis of EBITDA: earnings before interest, taxes, depreciation and amortization. Goodwill charges don't reduce EBITDA. So, at least in theory, putting the goodwill on the G stock won't affect its price. EBITDA, by the way, is how sexy things like Internet stocks and cable TV companies and wireless companies and C-LEC (competitive local exchange telecom companies) are valued by analysts.
By the way, "stapling" goodwill charges to a tracking stock is what AT & T intended to do when it bought Tele-Communications Inc. But it decided to give up the tracking stock plan late last year, before the TCI deal closed, because the structure was becoming unworkable and AT & T's stock price had moved up sharply. So AT & T decided it could do without the bells and whistles, and got rid of the tracking stock. |
