AirTouch bidding war deflates Internet hype
By John Borland
Staff Writer, CNET NEWS.COM
January 7, 1999, 3:55 p.m. ET
It's time for a reality check for the starry-eyed Internet sector.
Internet IPOs and mergers have made millions of dollars for investors in the last
several years. But the ongoing bidding war over AirTouch Communications, the San
Francisco-based cellular company that went public over four years ago, dwarfs even
front-page deals like the $4.2 billion Netscape-America Online merger.
The comparison is strained in some respects. AirTouch was created from the Pacific
Telesis Group's existing cellular business, taking what many observers have called
the crown jewels of the telephone company's business. The Internet companies--and
indeed the sector itself--are much newer, created essentially from scratch without a
list of tangible assets.
But today's AirTouch barely resembles PacTel's original bequest. Company
executives took a modest West coast cellular operation and transformed it over four
years into the biggest mobile phone company in the world, with a market valuation of
between $45 billion and $55 billion. This week's various bids for the firm even far
surpass the $16.7 billion paid for its one-time parent company when it was sold in
1996.
The company's rise is proof that the Internet's wild market ride is not unique, and can
even be outstripped by companies that are just as young in more mature sectors,
such as the phone industry.
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Equal and opposite reactions
AirTouch was spun out of Pacific Telesis in 1994, after company executives decided
to separate the Baby Bell's cellular and traditional telephone operations. The cellular
branch went public as a separate company on April Fools' day of that year, with a
$10 billion valuation.
In retrospect, the cellular business proved to be some the of Baby Bells' most
valuable assets, and many analysts say the deal weakened Pacific Telesis enough to
make it vulnerable to its eventual takeover by SBC Communications.
"Pacific Telesis Group's telephone assets faced one of the most difficult
regulatory environments in the country, and the bulk of senior management went with
[CEO] Sam Ginn to AirTouch," said ING Baring Furman Selz financial analyst Fred
Moran. "It left Pacific Telesis ripe for a takeover."
The structure of the spin-off also gave AirTouch a boost in its new industry, say
those who were close to the deal.
"What people often forget is that AirTouch was spun off debt-free," noted one
former Pacific Bell employee. "All the debt went back to Pacific Bell." This debt
didn't contribute to weakening the Baby Bell, the former insider said, but did help the
new cellular operation take off from a running start.
From spin-off to sell-off?
Ginn made good use of that running start, analysts say. The CEO promised to
double the stock's value inside of four years. After a slow start, he has more than
delivered on that promise, quadrupling the company's market capitalization in that
time.
The company's success has come through an aggressive expansion across the United
States, where the company now has a mobile presence
in 30 states. Additionally, the company made early
strides into the rapidly-growing international markets,
analysts say.
"Their success can be attributed largely to Sam Ginn's
success in Western European markets, where growth
has been close to 100 percent," said Moran. AirTouch
has investments in 12 foreign countries, with operations
in some of the most rapidly growing European markets.
The company said it had 4.9 million international
subscribers overseas, along with its 7.8 million U.S.
subscribers, at the close of the third quarter. Analysts
estimate that the company has grown to more than 17 million subscribers worldwide
by the end of 1998, easily making it the largest mobile phone company worldwide.
AirTouch now is poised to fill out nearly any company's telecom portfolio, and may
be a good match with any of the three companies who have now expressed interest.
Bell Atlantic, with which AirTouch already shares joint ownership of PrimeCo, a
PCS (personal communications service) company, wants to create a national U.S.
wireless footprint. If combined with the Baby Bell's East coast-based mobile
operations, the AirTouch subscriber base could be expanded from coast to coast.
Britain's Vodafone Group is aggressively expanding on the European continent, and
has invested alongside AirTouch in several overseas ventures. Joining the two
companies' operations would create a network that spans Europe, and would give
Vodafone a valuable presence in the U.S. and Asian markets.
MCI WorldCom has created a valuable international end-to-end phone network,
but lacks a wireless strategy. Chairman Bernard Ebbers has said in the past that he
prefers to concentrate on land phone lines, but many analysts have said the company
should have a wireless component if it is to compete with the world's other
full-service telecommunications giants.
The fruits of success
Whatever the outcome, analysts say the bidding war was a predictable--and very
beneficial--outcome for the original Pacific Telesis stockholder, who received a
share of both companies at the time of the 1994 spin-off.
"Both were set up to be bought out," Moran said. "But there's no doubt that the
separation was a major positive for all Pacific Telesis shareholders. Those that held
on to both have been handsomely rewarded."
Chief among the stockholders benefiting will be CEO Ginn, who stands to make
close to $150 million from cashing in on his own stock options and personal shares.
The company's financial filings show that Ginn has accrued more than 2.3 million
stock options since taking the company public in 1994, with exercise prices ranging
from $20.375 to $52.725. The outstanding bids for the company now range in the
mid-$90 per share range.
The bidding war has sparked some concern in non-shareholder circles, however.
The city of San Francisco, which lost Pacific Bell's corporate headquarters when the
company was bought by SBC Communications in 1996, is now loath to lose another
high-profile firm.
"We do take the position that we will do whatever we can do to keep them here,"
said Ron Vinson, deputy press secretary for San Francisco mayor Willie Brown. |
