The North Carolina Utilities Commission (NCUC) has approved price-cap regulation plans for four major telecommunications local exchange carriers (LECs) in the state: BellSouth Telecommunications...
Tracking Stock for Utilities: Highway to Higher Valuations?
use the equity markets to securitize a portion of its future CTC receipts.
Balancing Costs and Benefits
A tracking stock equity structure does not come without costs, however. In addition to the out-of-pocket expenses of undertaking a recapitalization and issuing a new class of security, tracking stocks impose other, longer-lived costs.
Conflicting interests: A house divided? Segregated shareholdings can lead to conflicts of interest. A tracking stock structure effects a financial reporting separation of a diversified company into different business groups. But these groups do not enjoy any independent legal status. Though a tracking stock represents an economic stake in one such business group, holders of the stock do not have any direct claim against the group's assets. In a bankruptcy, the assets of the entire company remain available to satisfy creditors of any one business group. Corporate policies and actions that disproportionately affect the fortunes of a company's different business groups may create ambiguities regarding the board's fiduciary duties of care and loyalty owed to the respective holders of the stock that tracks each such business group. The consequences of such ambiguities are likely to be much more severe where, as in the case of an integrated utility, one of the company's two business groups enjoys a monopoly status subject to regulatory oversight while the other group is exposed to competition.
Several companies that have adopted tracking stock equity structures have sought to address shareholder fairness issues by setting up separate board committees to oversee the relationship between their different business groups.[Fn.11] In order to minimize the potential for conflict between holders of its generation and T&D tracking stocks, a utility would have to put in place similar institutional arrangements that safeguard the interests of each set of shareholders.
Removing the Welcome Mat for Corporate raiders . Tracking stocks may also deprive their holders of a premium for control that often is embedded in the share prices of potential acquisition targets. A raider cannot acquire control of the tracked business group merely by accumulating shares of the tracking stock. Lack of a control premium, coupled with concerns about conflicts between the interests of the shareholders of the different business groups, has led some commentators to speculate that tracking stocks trade at a discount, ranging between 5 percent to 10 percent, to their so-called "peers," independent companies engaged in similar businesses.[Fn.12]
However, for an issuer, the more relevant inquiry, and the bottom line, is whether a tracking stock would increase the company's total market capitalization. By this measure, as the telecommunications success stories demonstrate, tracking stocks usually have lived up to expectations.
Even when one looks at the performance of individual tracking stock issues, instead of focusing on the combined equity securities of an issuer, recent research suggests that comparisons with peers are not as unfavorable as analysts might have believed. A Lehman Brothers' study shows that although more than half the tracking stock issues examined had lagged their peer groups in the short-term, after six months almost 80 percent of these tracking stocks had outperformed the competition.[Fn.13]
Everybody's Doing It: Reason