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Pacific Telesis Considers Spinning Off Bell Companies

April 16, 1992

SAN FRANCISCO (AP) _ Pacific Telesis Group is considering spinning off its local telephone companies to focus on cellular and other businesses - eight years after PacTel itself was spun off from AT&T.

The breakup would make sense for both the parent company and its investors, analysts said Thursday, because it would split the heavily regulated local phone companies from such less-regulated, faster-growing operations as cellular and paging systems and international phone services.

The company is one of seven regional ″Baby Bell″ phone companies formed by the 1984 breakup of American Telephone and Telegraph Co. On Wednesday it cited regulatory constraints and changes in the telecommunications industry as reasons for studying the issue.

If PacTel does split up, it would be the first Baby Bell to do so. The Bell subsidiaries that would be spun off account for more than 90 percent of its revenue.

″I think it’s a terrific idea,″ said Daniel P. Reingold, a telecommunications analyst with Morgan Stanley & Co. in New York. ″It’s a very logical and, I think, very smart proposal on the part of the company.″

A split would free Pacific Telesis’ non-local phone operations from the regulations imposed on Baby Bells after AT&T’s breakup, he and others said. Analysts also said a split could boost stock values and offer stockholders looking for different kinds of investments a choice.

″I think from a shareholder’s standpoint it’s a good thing,″ said Charles W. Schelke, an analyst with Smith Barney in New York. ″The sum of the parts is worth more than the whole.″

Pacific Telesis stock rose $1.75 a share Thursday to $41.75 on the New York Stock Exchange.

Pacific Telesis, based in San Francisco, has more than half a dozen subsidiaries. The largest is Pacific Bell, which provides local phone service to more than 22 million Californians. Nevada Bell provides service to about 230,000 phone lines in the Reno-Carson City area. Pacific Bell Directory publishes phone directories in California and Nevada.

The company said Wednesday it would undertake an ″in-depth analysis″ of separating the three Bell companies from other operations. Those include PacTel Cellular, one of the nation’s largest providers of cellular service with more than 534,000 subscribers, and PacTel Paging, one of the biggest paging companies with more than 474,000 units in service.

Pacific Telesis also owns Pacific Telesis International, which manages, operates and invests in phone businesses overseas, including operations in Germany, Britain, Thailand, Korea and Japan.

Pacific Telesis has devised no specific proposal for a split, said PacTel spokeswoman Tricia Palermo. The study, expected to take several months, simply will examine various legal, financial and regulatory issues, the company said.

Pacific Telesis has been profitable since its creation. But Sam Ginn, PacTel’s chairman and chief executive, said Wednesday the company also recognized the ″enormous technological, economic, competitive, political and regulatory changes occurring in the telecommunications industry.″

Many of Pacific Telesis’ operations don’t interrelate, Schelke said. More importantly, regulations imposed on Baby Bells hamper the company’s other operations.

″Everything that PacTel does, whether it’s part of its regular telephone companies or not, is constrained in some way or another by state regulations, federal regulations, or most importantly, the AT&T divesture decree,″ Reingold said.

PacTel can’t offer cellular customers long-distance service because the decree bars all Baby Bells from long-distance operations. ″But their competition can do that,″ Schelke said.

PacTel and other Baby Bells also can’t make phone equipment.

Ginn also said - and analysts agreed - that financial markets tend to favor more focused corporations and that Pacific Telesis’ stock has been undervalued.

Making cellular, paging and international telecommunications operations a separate corporation would ″unmask″ their value, Reingold said.

The cellular business, here and overseas, is becoming a very valuable part of PacTel but has so far diluted earnings because it is still a startup operation, he said.

PacTel had a 1991 profit of $1.02 billion on revenues of $9.9 billion.

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