DSL

DSL Prime News: SBC Good and Bad

DSL Prime balances its coverage of insider gains on the SBC buyout of Prodigy with several positive but elusive stories about the ILEC.

by Dave Burstein DSL Prime [October 1, 2001]

$80M gain for board member in SBC/Prodigy deal
Carlos Slim of Telmex gets windfall
At 3 p.m. last Friday, Carlos Slim Helu's 41,910,111 shares were worth $148M ($3.54 closing) before SBC's offer. At 5 p.m. that holding was worth $228M, meaning his closely held Carso Global Telecom gained $80M from the bid on a single day. Telmex netted an additional $24M on its separate holding of 12.5M shares. That's over 75 percent of the outstanding stock of Prodigy. Slim had previously suffered a large loss on his investment; we believe he bought his stake at $9-11 per share.

One interpretation of the SBC deal (unverifiable) is that the company is choosing to partly recompense him for his loss in what became effectively a joint venture. Every losing Internet investor would welcome such relief.

This story is probably not news to you, because The New York Times reported it Tuesday. I thank Simon Romero for including me in the story. My family doesn't take my work very seriously—it's just Internet stuff—but are always happy to see my name in the Times. My dad always regretted not taking a copyboy's job at the Times, which was how you started back then, even if you were an experienced reporter on another paper.

The $5.45 bid valued Prodigy (including SBC's stake) at $600M plus debt. That's hard to justify—Prodigy is losing $200M per year, facing discouraging revenue from dial-up ISP, and has no meaningful broadband base except the SBC DSL subscribers. Prodigy's most interesting asset is a contract with SBC that pays them $4-5 per month for every DSL subscriber until 2009, even though SBC provides most of the service, including the expensive customer support.

The 54 percent premium is very unusual for Internet stocks today. Verisign bought Illuminet the same day, for 2 percent above market. ISP customers are going for $25-100 in deals I know, which would suggest they overpaid, but Earthlink has a higher value per subscriber.

SBC's 50M shares have had a market value as high as $900M, but SBC's Selim Bingol writes "We structured the initial investment as a partnership, with a very small value. Operating losses have since taken that value down to zero. There will be no book gain or loss from the transaction."

This is not a recommendation to sell the stock, whose price is determined by many other factors. Questions about SBC financials have been raised already by the pros on Wall Street (if not by reporters), and presumably have already influenced the stock.

Standard & Poor's made the correct decision that this transaction is not large enough to affect the credit rating of a $140B company, although it is expected to add about $500 million in debt to SBC's balance sheet, including cash for the tender transaction and about $128 million of assumed Prodigy debt. Funds from operations interest coverage is expected to exceed 9 times for 2001, pro forma for the Prodigy transaction and SBC's 60 percent share of Cingular Wireless.

Some positive SBC stories
I am very anxious to balance DSL Prime's coverage of SBC, so have been working on five positive stories about the company, all of which have been on hold for several weeks waiting for information I've requested. Let me report what I have, although the stories have holes. This is also my way to apologize to many folks who have been generous with their time answering questions, and then saw little in print. I, like most reporters, research many stories that don't make it to print—sometimes backlog, but mostly like this, where I don't find enough to make a strong story.

• Installs are going faster. Anecdotally, about one-third are complete in under ten days, and only a handful are taking the 30-45 days averaged a year ago. I asked SBC how many days does it take for the average customer to go from order to working service? How has that varied over time?
  
  
• With Bell Labs crumbling, telco r & d becomes crucial. I believe SBC is doing far more than most realize, supporting first rate research. (I asked for some metrics)
  
  
• Ed Whitacre has said SBC's cost of installing DSL dropped 25-35 percent in the first quarter. I believe anecdotally things are continuing to improve in both cost and service, but have not been able to get metrics.
  
  
• SBC has some of the most advanced voice and video trials in the world. I asked for details.
  
  
• SBC's quarterly statement includes numbers without little explanation, including a $228 million cost of DSL deployment. This seemed to show continued improvement in Q2, another piece of evidence SBC is doing a better job. But I need to know what is and is not included in that number (marketing?, capex?) in order to write a useful report.

We are journalists, not investment advisers; invest at your own risk and do further research.

Copyright 2001 Dave Burstein.
The DSL Prime Newsletter is reprinted with permission.

"The power of the printing press belongs solely to those who own the presses"
—A.J. Leibling

The Internet is the cheapest printing press ever invented.

1. DSL Prime News	4. SBC Good and Bad
2. Cheap Equipment	>5. DSL Prime News Briefs
3. Intel vs. Tauzin-Dingell