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Tracking Stock for Utilities: Highway to Higher Valuations?

Fortnightly Magazine - April 1 2000

separate tracking stocks for its US Steel Group and Marathon Oil Group. In April 1992, USX issued a third tracking stock, for its Delhi pipeline assets, the USX Delhi Group. USX Corp. has since redeemed this stock.[Fn.15]

Other Early Plays. In addition to General Motors and USX Corp., early issuers of tracking stocks included The Pittston Co., for its coal operations, Pittston Minerals Group, in July 1993; Seagull Energy Corp., for its Alaska utility operations, in May 1994; Genzyme Corp., for its Tissue Repair Division, in November 1994; Tele-Communications Inc. for its Liberty Media Group, in July 1995; and US West Inc., to separate its Media Group from its Communications Group, in September 1995.[Fn.16]

Failed Attempts. At least two prominent U.S. companies have proposed but failed to issue tracking stocks. Kmart Corp.'s proposed issue, detailed in its annual report and proxy statement dated April 28, 1994, was rejected by its stockholders on June 3, 1994.[Fn.17] RJR Nabisco Holdings Corp.'s stockholders voted on June 23, 1993, to reject a tracking stock capital structure that had been proposed and explained in the company's proxy statement dated June 4, 1993.[Fn.18]

(Ir)rational Exuberance? The stock market's current lofty valuations of Internet, wireless telephony, and other new-economy businesses have led to a rash of new tracking stock issues.

Genzyme Corp. issued a second tracking stock, for its Molecular Oncology Division in 1998, and followed it up with a third issue, for its Surgical Products Division, in 1999.[Fn.19] Sprint created a separate stock linked to its wireless telephony operations, PCS Group, in November 1998 that MCI WorldCom Inc. will retain as its tracking stock after completing its merger with Sprint. Other recent tracking stock issues have included Donaldson, Lufkin & Jenrette Inc. for its online brokerage firm, DLJdirect; DuPont Co. for its life-sciences business; and Staples Inc., The Walt Disney Co., and Ziff- Davis Inc., for their respective Web-related businesses. The Quantum Corp. became the first Silicon Valley company to adopt a tracking stock equity structure when, in July 1999, it issued separate stocks linked to its disk-drive and digital storage businesses.[Fn.20]

The strongest endorsement yet for tracking stocks came when AT&T revealed plans for a public offering of a stock that will track its wireless business. The offering, slated for the first quarter of 2000, is likely to be the largest IPO in U.S. history.[Fn.21]

Asset Deals: Incentives on the "Buy" Side

A tracking stock equity structure may offer an alternative to, or a step toward, an asset divestiture. Tracking stocks may also make a utility a more attractive merger candidate. But do tracking stocks offer any benefits to acquirers of assets?

Cheaper Financing. Consider the recent turnover in the ownership of generation assets prompted by ongoing electric restructuring. Utilities that have been actively seeking to acquire generation assets generally have refrained from tapping equity markets. Typical investors in utility stocks, who would constitute the majority of a utility's existing shareholders, are unlikely to respond favorably to management bidding aggressively in auctions for generation assets. As a result, acquirers largely have relied on bank lending and the