Institutional portfolio managers and Wall Street are enthusiastic about Tele-Communications Inc.'s planned reorganization.
The nation's largest cable television operator announced Nov. 18 it plans to reorganize itself into four separate business units, with each issuing stock. The stock price of TCI headed north on the announcement. Shares jumped 75 cents to close at $24.125 on unusually high trading volume.
Chip Morris, president of the $800 million Science and Technology Fund of T. Rowe Price Associates, Baltimore, Md., thinks the spinoff is "a great move"
He said CEO John C. Malone realizes "as long as (TCI's) P&L is dominated by domestic cable, the business will be valued at 8 to 10 times cash flow." By contrast, foreign cable operations and programming - which would be spun off in the reorganization - would definitely merit higher valuations.
"From a valuation creation standpoint, this separation should be positive for all investors," Mr. Morris said.
TCI and other companies that announced recent spinoffs have proven to be very attractive investments - and in such deals portfolio managers have a voracious appetite for shares of the parent company, the new divisions or both.
The same day TCI unveiled its plans, Hilton Hotels Corp. revealed it is considering a sale or a spinoff of some of its units. Hilton Hotels shares climbed $10 to $67.875 since its announcement.
Divisions spun off from a larger, diversified entity are easier for analysts and portfolio managers to value and position in portfolios.
"It is well accepted in finance theory that the sum of the parts is worth more than the whole," said Geoffrey Brooks, professor of management at the Wharton School of the University of Pennsylvania, Philadelphia.
Practically speaking: "Invest-ment managers like pure plays. When you mix businesses you don't get as much as when you break them up," said Malcolm Pirnie, president of Harbor Capital Management, Boston, which has been buying spinoffs as an investment theme for some time.
TCI plans to split into divisions focusing on domestic cable television and telephone; television programming; international operations; and technology ventures.
The parent company would remain a holding company, with interests in each division. The company has not yet decided whether to carry out the plan with a tax-free stock dividend, a rights offering or an exchange offer to current shareholders.
More details will be available after the company's board meets Dec. 5.
All of TCI's debt will remain with the domestic cable business, probably the slowest-growing of the four, giving the other divisions greater financial flexibility to make acquisitions, he said.
If valuations continue to diverge in the media industry between domestic cable and programming companies, Mr. Morris expects more spinoffs, perhaps at such companies as Viacom Inc. and Turner Broadcasting System Inc.
Arden Armstrong, general partner of Miller, Anderson & Sherrerd, West Conshohocken, Pa., said TCI has "shown a real knack for turning companies into better values by spinning them off."
For instance, in 1991 TCI spun off a portion of the company's programming holdings into Liberty Media, then moved to repurchase it last year.
At the time of the spinoff, the market thought Liberty was "complicated," yet the stock performed spectacularly well, she said.
"We do look favorably on spinoffs. Oddly enough, one part will be perceived as attractive and one less," Ms. Armstrong said. "Sometimes the piece perceived to be unattractive will be the best performer because it starts out cheap. We've invested in spinoffs a lot in the past.
"We try to keep the piece that nobody is focusing on. This case is a little different. All four groups are attractive."
Miller Anderson will hold all four pieces. The firm, which runs $29.6 billion, including $12 billion in equities, has owned TCI since 1986. It has at least 3.6 million shares, she said.
"I am a believer in the company. John Malone is the best money manager I've ever met. The parent will be turned into a portfolio manager of businesses and John Malone is a great portfolio manager," Ms. Armstrong said.
Before the spinoff, Miller Anderson could own TCI only for large-capitalization accounts. But after the deal, the firm might be able to buy some pieces for small-capitalization accounts, she said.
By remaining the parent company, TCI will assure all of its bases are covered as winners emerge in the technology race.
"No one really knows what pieces will be important in the future of the information super-highway. Most companies hedge their bets by getting a stake in lots of parts of what will control the industry. TCI is still in a good position if Malone maintains central control," Wharton's Mr. Brooks said.
"It's been our experience that spinoffs are often a way to find some excellent companies at bargain prices," said Paul Wick, vice president of J&W Seligman & Co. Inc., New York, and portfolio manager of the $360 million Seligman Communications and Information fund.
Often an unrelated division of a conglomerate is capital-constrained until a spinoff allows it to grow. At the same time, "line managers who were stuck in the division and not a major part of the overall company suddenly have a chance to run their own show at a public company. ... Managements have a real incentive to shine," Mr. Wick said.
In the spring, he purchased Merix Corp. - an interconnect and printed circuit board company spun off from Textronix Inc. - at $9 a share. Now it's trading at 173/8. Mr. Wick does not own TCI; he is avoiding most cable companies because of heavy government regulation of the industry.
Some managers were less certain of TCI's prospects.
"This may be one that is so complicated it may have had a little pop here on the news, but the euphoria may be dissipated on the complexity of the transaction," said Robert Mancuso, vice president of Glenmede Trust Co., Philadelphia.
Jack Church, senior vice president and chief investment officer of Glenmede, said: "We have sort of a cynical view here. (Spinoffs) go in waves. " Glenmede runs more than $7 billion and owns a small stake in TCI. When Wall Street has had enough of breaking up companies, it starts putting companies together again, he said.
Mr. Mancuso said that while total spinoffs typically benefit the stocks, partial spinoffs often have only a short-term effect. Subsequently, the stock may be under-followed by Wall Street. "They don't create the value a full spinoff does. In this case you'll still have TCI the parent. It's not clear if it will be letter stocks or publicly traded subsidiaries. It's too complex to really fully analyze yet. There are too many unknowns."
"I think the area people will put the most value on is the programming business," even though cable is likely to be the largest business in terms of market capitalization and fixed assets, he said.
Mr. Mancuso said he often finds opportunities in the six-month interval between the announcement of a spinoff and the time it takes for Wall Street to start to cover the company.
A case in point is Eastman Kodak Co.'s spinoff of Eastman Chemical Co. at the end of 1993. "Chemical analysts were not familiar with the company; photography analysts were not interested in that side of the business. But the two pieces were worth more than the whole." Glenmede owns shares in both companies, but more in the chemical company.
Rick White, a portfolio manager with the Salomon Brothers Fund and Salomon Brothers Investors Fund, which total $1.5 billion, said the firm is looking at the TCI deal. "Over the years (TCI) has been a tough company to do the numbers on," he said. He hopes that as a result of the spinoff, the pieces of TCI will be easier to analyze than the entire company has been.
Harbor Capital Management, which runs $2.5 billion, bought shares of Eastman Kodak after the spinoff because the deal helped clean up the parent's balance sheet by laying debt onto the subsidiary.
Another of Harbor's holdings, Thermo Electron Corp., "is a master at realizing shareholder value by spinning off pieces." The company keeps 50% of the divisions it spins off, which Mr. Pirnie referred to as "pups."
"The pieces trade at hefty valuations. The public's valuation of the pieces keeps the value of the parent up. We own the parent - it has great management - but also have owned two 'pups' at various times."
Like Mr. Mancuso, Mr. Pirnie said "if it's a business which really doesn't fit, we'd like to see the whole thing spun off," as in the case of Kodak. But with related businesses, as in the case of Thermo Electronics, "it's better to keep a hold on them. The businesses are growing."
Harbor also owns ITT Corp., which Mr. Pirnie anticipates will spin off divisions in the future.
The firm does not own TCI or Hilton.
