Telecommunications equipment suppliers and media companies are the surest to profit from the deregulation of the telecommunications industry, institutional portfolio managers say.
But the fate of long distance vs. regional telephone companies remains uncertain because of differences between a Senate-passed bill and a House proposal.
Although the Senate overwhelmingly approved a telecommunications bill June 15 that would eliminate regulation for telephones, cable television and broadcasting in one fell swoop, it is too soon to tell what bill the House will hash out and when or if final legislation will emerge.
"A lot of companies will spend a lot of money to defend against heightened competition ...... and get into unregulated businesses," said John Levinson, senior vice president and portfolio manager of Lynch & Mayer, New York, which runs more than $6 billion.
"This will benefit the arms suppliers to the various battles - companies with the equipment to make a cellular infrastructure."
His picks in that category: Motorola Inc., Finland's Nokia Group, Spectrian Corp., General Instrument Corp. and Octel Communications.
Managers also think media companies will be hot acquisition targets as the channels of distribution increase and players scramble to find quality programming.
Media companies will be sought after by both telephone and cable companies, said Anita Springer, principal in charge of global equity research of Scudder, Stevens & Clark, New York.
But even if the House approves a bill this summer, the Senate and House still will have to go to conference, which could take six months to more than a year, she said.
Consequently, many telecommunications analysts and portfolio managers are not making big changes because of the proposals.
"The bill's only through the Senate. To make radical changes now is a little early," said Brian Kelly, portfolio manager of $200 million in three INVESCO mutual funds: Worldwide Communications, Balanced and Utilities. The firm runs $10 billion.
"The bill speaks much more to cable, TV and radio as far as portfolio decisions now than telecommunications," Mr. Kelly said.
In its current form, the House bill goes further than the Senate bill in lifting rate regulations for cable TV systems and ownership restrictions for broadcasters.
A modified version of the bill could reach the House floor as soon as this week.
While Ms. Springer agreed "the devil is in the details," she is fairly sure of one thing: "Incumbents with large market share are at risk." Such companies will be forced to aggressively cut costs while maintaining high level capital spending to compete. That spells opportunity for suppliers, such as Sweden's LM Ericsson; Nokia; Canada's Northern Telecom Ltd. and AT&T Corp., she said.
"We certainly are trying to take advantage of buying telecommunications equipment suppliers," Ms. Springer said. She also expects suppliers to the cable industry such as General Instrument, Scientific-Atlanta Inc. and Antec Inc. to benefit. Niche players like DSC Communications Corp. and Tellabs Inc. also look attractive.
Lynch & Mayer began accumulating positions in telecommunications equipment suppliers nine months ago. "It makes sense to buy them right now. Fundamentally these companies are undervalued."
Lynch & Mayer's only media stock is Viacom Inc., which it considers the most creative in terms of television franchises.
It doesn't hold Time Warner Inc., partly because it's not a pure play - with half of its business in cable.
"We try to have relatively concentrated portfolios," with 40 or so stocks, Mr. Levinson said.
Mr. Levinson is avoiding service companies because "arms suppliers benefit a lot more than the companies doing battle. The last thing I want to do is own a company with heightened competition in its core market that's trying to build a presence" in a new market.
State Street Research & Management Co., Boston, which has $24 billion in assets under management, has been positioning its portfolio in cable, entertainment and broadcasting stocks in anticipation of the bill.
Still, portfolio managers are hesitant to make big moves in telephone stocks.
Anticipating the loosening or removal of limits on how many stations a broadcaster can own, State Street Research added to positions in Renaissance Communications Corp., Infinity Broadcasting Corp., Capital Cities/ABC Inc. and Australia's News Corp. Ltd. It also significantly increased positions in entertainment software with such holdings as The Walt Disney Co.; News Corp. again; and Time Warner. Time Warner - as well as Comcast Corp. positions were increased last week because they are expected to enjoy the potential easing of regulatory burdens on cable companies, said Larry Haverty, senior vice president and analyst.
Among State Street Research's smaller cap holdings: Lin Broadcasting Corp., Clear Channel Communications Inc. and Evergreen Media Corp.
Portfolio managers say the fate of telephone companies depends on which version of the bill passes.
The bill passed by the Senate favors regionals over long-distance companies. The House proposal does just the opposite.
State Street Research is underweighting the so-called R-BOCs, regional Bell operating companies, but owns larger positions in some long-distance companies like AT&T, World Communications Inc. and ALC Communications Corp.
By contrast, INVESCO is cautiously increasing regional Bell stocks.
"Over the last three to four months in the utility portfolio, we have been making slight adjustments based on the deliberations. We're slightly and selectively increasing exposure to the regional Bells," Mr. Kelly said. Southwestern Bell Corp. and Ameritech Corp. were augmented.
Michael Barton, vice president of State Street Research said: "Washington watchers tell me that in the past the House has always prevailed .... Maybe what's evolving is a more balanced bill with positives for both parties." Indeed, in the past week both regional and long-distance company stocks have gone up, he said.
Observers say either bill will favor cable and broadcast networks, which would be freer to merge and buy small stations. And cable companies would be able to raise rates.
Whether a final telecommunications bill emerges, deregulation already is under way on the state level as technological advances are lowering prices and spurring competition, according to Ms. Springer.
Others believe a bill is inevitable.
"The bill will benefit from its complexity. It has strong bipartisan support. It's unlikely the president will veto it. Even though for sure he's uncomfortable with cable deregulation, we think it will go through.
"He can't afford politically to be against the information superhighway," said Mr. Haverty.
