Public Utilities Reports

PUR Guide 2012 Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now

Tracking Stock for Utilities: Highway to Higher Valuations?

Fortnightly Magazine - April 1 2000

of common stock outstanding. Sprint's Class A Common Stock tracks the company's FON Group, which consists of Sprint's long-distance and local telecommunications divisions. Sprint's PCS Common Stock is linked to the PCS Group, which includes Sprint's wireless mobile telephony services. Sprint's PCS tracking stock has performed spectacularly, with a fivefold increase in value in just over a year, and MCI WorldCom intends to adopt it as its own tracking stock after it completes its acquisition of Sprint.[Fn.5] Despite a shakeup in its executive suites, Global Crossing Ltd. is proceeding with plans to issue a tracking stock for its Internet-services business, GlobalCenter Inc.[Fn.6] SBC Communications has said it may create a tracking stock for its wireless operations. And from Atlanta comes word that BellSouth is contemplating issuing as many as three separate tracking stocks - one each for its wireless, international, and Internet divisions.[Fn.7]

Dressing Up the Divestiture

The success of telecommunications "trackers" suggests that utilities may be able to profit from instituting tracking stock capital structures that allow an investor to "cherry-pick" among regulated and deregulated businesses. But can't a company give investors the same choice by incorporating and listing separate subsidiaries? Why implement a tracking stock structure instead?

Because tracking stocks offer the benefits of segregated shareholdings without sacrificing the advantages of a combined balance sheet - greater borrowing capacity, higher credit rating, and the stability of a diverse asset base. In addition, a single corporate entity means one tax return and the continued ability to shelter income from one division against losses in another. And even for a utility considering an eventual spin-off, partial or complete, of some or all lines of its existing generation business, a tracking stock can be a useful intermediate step. With separate financial reporting already in place for a utility's generation operations, capital markets should be well prepared for receiving and pricing stock in a generation subsidiary that the utility eventually spins off.

Green Light From Wall Street . Tracking stocks often result in greater analyst coverage and better valuations for the divested subsidiary. Wall Street is familiar and comfortable with the strategy of prefacing a spin-off with a tracking stock issue. The stock market's enthusiastic reception of US West's separate tracking stock for its Media Group culminated in the Group's spin-off as an independent publicly traded company under the name MediaOne in November 1998.[Fn.8] Not long after that, in April 1999, AT&T entered into an agreement to acquire MediaOne for $85 per share, representing a return of over 500 percent since the stock was issued in September 1995 and over 200 percent in the five-month period since US West had completed the spin-off.[Fn.9]

Attracting Mr. Right. In addition to yielding a higher valuation for a spin-off, a capital structure with different classes of common stock that separately track a utility's generation and T&D operations also could serve as a prelude to a successful "exit" strategy. A utility with a tracking stock equity structure that puts itself up for sale will attract a pool of potential acquirers that includes those interested in acquiring all of