Banking & Capital Markets

Stock Repurchases: The Old Squeeze Play

With share prices plummeting, a few companies buy back minority stakes in their own subsidiaries.
Joseph McCaffertyOctober 10, 2001

Now that the flurry of stock-buyback announcements is easing up, a different kind of buyback is gaining ground. Companies are scooping up minority stakes of firms they already control.

Just last Thursday, managers at Tyco International Ltd., a Bermuda- based manufacturer, announced they would repurchase the public’s 11 percent stake in TyCom, an undersea cable company that Tyco spun off in July 2000. On the same day, Tyco’s Bermuda-based neighbor, Global Crossing Ltd., announced the merging of its Asia Global Crossing subsidiary back into the parent. Also, management at SBC Communications Inc. recently revealed that the telco would acquire the (not yet owned) minority stake in Prodigy Communications Corp.

Many of the repurchasing companies are seizing the opportunity to buy back shares at reduced prices. But a few of the transactions, sometimes called squeeze-out mergers, are admissions that the subsidiaries can’t cut on their own. Tyco’s purpose of spinning out TyCom was to create a high-multiple stock that could be used as currency to complete a string of acquisitions. But Tycom equity, which was sold to the public at $32 per share, is now trading in the neighborhood of $14, and the current economic environment makes new acquisitions difficult.

Tyco management must now deal with the sensitive issue of profiting from the failed spin-off. Tyco is offering shareholders less than half of what those investors paid for the shares last year. Hence, the parent is essentially closing a short position that will net Tyco a $1.1 billion profit.

Global Crossing’s attempt to purchase its Asian subsidiary is also raising some hackles. The parent company might be in worse shape than the subsidiary; Global Crossing is carrying nearly $7 billion in debt, while Asia Global Crossing has around $1.2 billion in leverage on the balance sheet. What’s more, some observers believe the Asia unit is the stronger operation. Global Crossing managers want to cut costs by taking advantage of synergies. But, some Global Crossing watchers consider the repurchase a takeover by the subsidiary, since Asia Global Crossing CEO John Legere will take over as CEO of Global Crossing, replacing Thomas Casey, who spent just 12 months on the job.

In addition, AT&T Wireless Services announced it would acquire the 77 percent of TeleCorp PCS Inc. that it does not yet own for $2.4 billion in stock. The deal will allow the third-biggest U.S. wireless company to expand its coverage in both the South and the Midwest. Analysts say the deal is a bid by AT&T to gain more licenses for airwaves, allowing the company to beef up its coverage, or spectrum, in TeleCorp’s markets, according to Reuters.

From the Islets of Langerhans, an IPO

After almost two months of inactivity, the IPO silence was broken by Given Imaging Ltd. on Thursday. The Israel-based medical imaging company sold five million shares at $12, on the low end of its $12 to $14 range. The stock closed at $12.47, slightly below its opening of $12.60. The fact that the IPO was completed at all is considered something of a victory, especially since lead underwriter Lehman Brothers was forced out of its headquarters in lower Manhattan as a result of the September 11 attacks. Given Imaging makes a pill that contains a wireless camera that provides images of a patients digestive tract once it’s been swallowed.

Managers at Alameda, Calif.-based Therasense Inc. are hoping to follow Given Imaging’s lead. The maker of glucose-monitoring equipment for diabetics is hoping to raise up to $120 million in an IPO this week. The deal is being led by U.S. Bancorp Piper Jaffray Inc.

Although the company does not yet have any profits, management is hoping to tap into investor enthusiasm for issues from pharmaceutical and medical companies, which are thought to be resistant to the decline in the economy.

The recent drought in the IPO market was the longest since the mid- 1970s. However, some investment bankers are predicting a possible rebound later this year. Even with the slew of withdrawn offerings over the past month, 55 companies still have IPOs on file with the SEC. Twenty- three of the the filers are established — and profitable — companies. Thus, some investment bankers say those issuers should be able to move ahead with their deals. The health-care sector leads in expected activity in the IPO and secondary markets with 35 deals slated to raise $5.2 billion, according to Dealogic CommScan.

In Brief

  • Tower Records is working to steer clear of the cut-out bin. The privately-held, Sacramento, Calif.-based firm has amended a credit line with a group of 11 banks. Tower will acquire much-needed cash that will enable it to run through the first quarter of 2002. The music retailer will be able to tap a credit line of up to $205 million through December 31, and an additional $195 million through April 2002.
  • Travel and real estate service company Cendant Corp. completed a $1.5 billion revolving credit facility with a banking group led by J.P. Morgan Chase, bringing its total revolving credit to $2.9 billion.
  • These guys know venture capital. Red Herring Magazine received a $5 million investment from Broadview Capital Partners making the venture capital fund the largest shareholder of the magazine which covers the technology and venture capital environment. The magazine recently moved from a bi-weekly format to a monthly schedule, and it orchestrated some additional layoffs in order to cut costs.