Tracking stock might have right ring for BellSouth

BYLINE: Michael E. Kanell, Staff
DATE: 01-12-2000

BellSouth Corp., whose Wall Street reputation has lately languished, is mulling the idea of creating a tracking stock --- or maybe two or three of them. A tracking stock, an equity that gives shareholders a way to invest in one piece of a much-larger corporation, could unleash billions of dollars in now-hidden value, raise huge amounts of cash and maybe even lift the company's primary stock price --- while recasting BellSouth's image from a stodgy, old-line phone company to a bold online growth play. Maybe.

Tracking stocks have done all that for some other companies. However, tracking stocks have also sometimes been aching disappointments. Georgia-Pacific's tracking stock for its Timber Co., for instance, has won an erratic embrace from investors. Timber Co. stock closed Tuesday at $23.75 a share, just a few dollars higher than its value when it was created in 1997.

But for inspiration, BellSouth is more likely to look in its own industry --- Sprint's wireless unit. Sprint PCS soared from less than $13 a share after its creation in late 1998 to more than $113 late last year. It closed Tuesday at $97.62 1/2. In the seven months before the tracker was created, Sprint stock traded mostly between $30 and $36.50 a share. Since then, shares have climbed steadily, climbing to $75.50 before sliding back to close at $59.93 3/4 Tuesday.

Like Sprint, BellSouth could issue tracking stock for wireless. But BellSouth has two other options as well. The company has a promising international business, especially in Latin America, where BellSouth is the largest outside investor and has seen double-digit expansion. BellSouth also has a growing Internet unit --- and has seen investors fawn often over anything named "dot-com" or "dot-net."

BellSouth spokesman Jeff Battcher confirmed that the notion of a tracking stock is on the table, but declined to offer details. " Yes, it is something that we have looked at. Yes, it is something that we continue to evaluate, but no decision has been made."

By creating a tracking stock, a company stops short of spinning off an independent subsidiary. Holders of a tracking stock receive no special voting rights. The unit has no distinct board and remains a part of the corporate parent. Instead, the stock represents a high- growth piece of a company whose overall value is judged by other businesses.

The original tracking stock was Electronic Data Systems, issued in 1984 by its then-parent, General Motors.
Tracking stocks remain relatively rare --- only about three dozen in all. But the idea seems to be picking up steam. Recent trackers include the Internet arms of Donaldson, Lufkin & Jenrette Securities and Ziff- Davis, the Circle.com unit of Snyder Communications, the CarMax unit of Circuit City, as well as units of Genzyme Corp., Pittston Co. and Perkin-Elmer.

Late last year, AT&T announced plans to issue a tracking stock for its wireless division. SBC Communications has said it may do likewise for wireless, Walt Disney Co. is talking about a tracker for its Go.com unit, and even Microsoft is pondering the possibility.

Overall, performance of trackers has been mixed at best. Take out the top two tracking stocks and the whole sector lost 16 percent in value in 1999, said Mark Minichiello, vice president of Chicago-based Spin-Off Advisors.  For shareholders, there are some advantages. First and foremost is the chance to gamble on what could be a high return without most of the risk that comes with buying a start-up or a small company that could be swallowed. But there is a downside.

Minichiello said the package is generally not attractive. "We prefer to own the assets we are buying. With a tracking stock, you are buying the valuation but not the underlying assets. The company is trying to get the value of a separate division, but they are retaining complete control. Management is having its cake and eating it, too." In a worst-case scenario, the corporate parent can make decisions that are bad for the unit --- and the tracking stock's price. Yet Minichiello said he would welcome a tracking stock from BellSouth. "It would be a positive step because they are looking to increase shareholder value, and this may be a catalyst." BellSouth does seem increasingly nudged toward action.

The company quarter after quarter churns out ever-larger earnings and has grown to more than $25 billion in annual revenue. Yet that growth --- solid, steady, sensible --- is suddenly not enough.
BellSouth stock has, after 15 years of steady, strong growth, largely languished.

A year ago, it sold for $46.43 3/4 a share. Since then, while many technology stocks have rocketed, BellSouth has traded in a narrow range. After cresting at nearly $51 in August, the stock dipped to a low of $41.37 1/2 in October and closed Tuesday at $44.43 1/4 a share.
Moreover, the company that represented for more than a decade the largest of the seven Baby Bells created in the 1984 breakup of AT&T, is --- thanks to a series of mergers --- soon to be the smallest of four remaining Bells.

BellSouth's leadership has ardently maintained that it can survive and thrive in the new world, that its focus brings it closer to customers and that when bulk is needed, it can forge alliances. Yet the strategy has left Wall Street lukewarm.

Analysts have increasingly described BellSouth as a decent, but unspectacular, investment. Unlike Bell Atlantic or SBC Communications, BellSouth is not seen as a mega-carrier in the making. Unlike AT&T, BellSouth is not seen as a risk-taker gambling on new ways to deliver communications. Unlike its partner Qwest, BellSouth is not viewed as an aggressive deal-maker --- although BellSouth sees it differently. Moreover, the telecom landscape has shifted around BellSouth so that the company seems beset by both behemoths and wannabes.
At one end are a series of thunderous mergers that are building monster telecommunications companies that cross old boundaries between regions, nations, markets and technologies.

At the other, tiny start-ups with little revenue and often no prospect of profit are suddenly worth billions as their stock values rocket into the stratosphere.  While it continues to churn out profits into the foreseeable future, a company like BellSouth seems squeezed. Companies of that "new" economy --- America Online from the Internet, Global Crossing from the world of high-speed data --- are suddenly capable of using their spectacular stock value as currency to buy older, more established players. On the other hand, the muscular merger players like Bell Atlantic or MCI WorldCom seem able to offer global reach.

Also frustrating is BellSouth's inability to offer long-distance in its region, approval that would let the company package all telecom services to customers. But a tracking stock could --- at least for a time --- coat BellSouth with the aura of growth, the veneer of boldness. The company's huge traditional business in local phone service may no longer get respect from investors, but its U.S. wireless business now boasts 5.1 million subscribers, its international business 5.2 million. BellSouth.Net has 700,000 customers.

Create tracking stocks for those units, and BellSouth would likely reap an immediate windfall. Then, if the tracking stocks do well - -- and those units are growing quickly --- BellSouth might later be able to use that value to grow the new-fashioned way.

BellSouth's stock has been in a narrow range for more than a year as investors have treated it like a ho-hum telephone company. If BellSouth issues a tracking stock, the hope would be that it would have the same result Sprint enjoyed. Since Sprint issued its tracking stock on Nov. 17, 1998, Sprint stock has risen 68 percent; the

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