NEW YORK-Shareholders of Cellular Communications Inc., New York, were scheduled to vote Aug. 16 whether to approve the company’s acquisition by AirTouch Communications Inc., San Francisco. Once the merger is approved, AirTouch plans immediately to issue two classes of convertible preferred stock to holders of CCI common stock in order to complete its acquisition. The new convertible securities will trade publicly on the New York Stock Exchange.
Moody’s Investors Service Inc., New York, has assigned investment-grade Baa3 credit ratings to AirTouch’s proposed issuance of more than 17.2 million shares of 6 percent Class B mandatorily convertible preferred stock and its planned issuance of up to 19 million shares of 4.25 percent Class C convertible preferred stock.
“The value of the mandatorily convertible stock to the company is that it gives AirTouch some financial flexibility over time because it can defer dividends for a period of time; and the securities later convert to common equity of the company,” said Dennis R. Saputo, senior credit officer, telecommunications and media, for Moody’s. “The investor gets a fixed rate of return in addition to possibly participating in the appreciating value of the company. Clearly, the company must meet dividend requirements, [which isn’t the case with] common stock.”
Moody’s, as a debt rating agency, likes mandatorily convertible preferred stock because it gives AirTouch more flexibility in its handling of its indebtedness to bondholders, Saputo said. Even so, the Moody’s analysis, which Saputo co-authored, predicts a short-term debt load increase for AirTouch coupled with slightly deteriorating cash flow margins, the latter due to competitive pressures.
“However, an improving trend should begin again in mid-1997 once debt levels peak,” Moody’s said. “This trend will reflect not only declining leverage and continued growth of domestic operations, but also the maturation of the company’s international partnerships and joint ventures.”
The only group of people who may not benefit from AirTouch’s issuance of mandatorily convertible stock are its holders of common stock. They may lose out somewhat if the company’s earnings are diluted later on as a consequence of its meeting obligations to the owners of mandatorily convertible preferred stock, Saputo said.
Purchasers of the convertible preferred stock pay more to buy individual shares, but they also are guaranteed minimum interest payments, capture much of the common stock’s share price rise potential and limit their exposure to the common stock’s potential for decline, according to a report by Deutsche Morgan Grenfell/C.J. Lawrence Inc., New York. The plain vanilla common stock doesn’t now pay dividends.
