Tim,
Check out XTON. IPO eLottery
Executone moves toward eLottery
Internet spinoffs power several companies
By Thom Calandra, CBS MarketWatch
Last Update: 5:40 PM ET Jan 26, 1999
Calandra 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.
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.
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.
Fred |
