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STOCK WATCH / Robert Hanley

'Undervalued' Pacific Scientific Co. Is Ripe for the Taking, Analysts Say

September 14, 1986|ROBERT HANLEY

If you are one of the key executives of a public company that has modest debt, marketable assets, plenty of working capital, a relatively depressed stock price and minimal insider ownership, perhaps you don't answer the phone.

If you do, you might pray that it isn't T. Boone Pickens on the line.

That's the spot the folks at Pacific Scientific Co. reportedly are in these days.

"These guys are hiding from everybody," said John Montgomery of Washington-based Foxhall Investment Management. "They have got a truckload of money and you could leverage it like a bandito ."

Although no one has yet taken a serious run at the company, it is a pretty good bet that it will get noticed, now that Roderick MacIver is telling his clients what a great leveraged buyout Pacific Scientific Co. appears to be.

MacIver, whose firm Roderick MacIver & Co. specializes in researching companies whose stocks have gotten hammered but still contain fundamental value, could be described as a point man for the arbitrageurs: Lots of them subscribe to his quarterly report.

Perhaps he only has a keen sense of the obvious, but MacIver boasts that in the five years he has been doing this, 65% of the companies he has picked as takeover candidates were acquired within three years of his prediction.

In his most recent tome, released last week, MacIver said that based on a review of Pacific Scientific's filings with the Securities and Exchange Commission, as well as other sources of information, the company is undervalued and "control appears to be available in the market."

Pacific Scientific officials could not be reached last week to comment on MacIver's analysis.

Traded on the New York Stock Exchange, Pacific Scientific closed Friday at $13.25 a share, up slightly from its recent low of $12 a share, but way off of its three-year high of $40 a share. However, the company's net asset value is at least $11 a share more than its current book value of $10.80 a share, or about $22 a share, MacIver said.

Suffering from a three-year decline in profits, Pacific Scientific--whose chief product for a long time was a shock arrester for the now-unpopular nuclear power industry--reported a 19% drop in net earnings for the first half of this year. As previously reported, company officials expect various cost-cutting measures they have implemented to result in a year-to-year earnings during the quarter that ends this month.

Despite the lackluster performance, Pacific Scientific had at the end of June $68.1 million in working capital, of which $34.5 million was cash. That working capital, MacIver notes, is pretty close to the company's current market value of about $79 million.

At the same time, long-term debt--consisting of 7.75% subordinated debentures convertible at $38 a share--is only about 30% of fixed capital. And Pacific Scientific has "significant underutilized assets" that could be either sold off or made profitable, he said.

"I think Pacific Scientific is a liquid company that appears to be undervalued," MacIver said. At current prices, he added, most or all of a purchase could be leveraged and insiders hold less than 8% of Pacific Scientific's outstanding shares.

Despite some defensive measures, including rules requiring a super-majority of shareholders to approve anything and staggered terms for directors, Pacific Scientific's vulnerability to a takeover attempt is real, agrees Foxhall's Montgomery.

Although much stock is in the hands of friendly holders--including the Prudential Insurance Co. and other institutions--who might be willing to thwart a hostile takeover bid, Montgomery said the temptation to bail out in the face of a generous offer would be considerable.

No one has yet launched a hostile campaign to take over Pacific Scientific, at least according to current SEC filings. Still, observes Montgomery, Pacific Scientific officials "aren't going to be overjoyed" with MacIver's report. "That company is a sitting duck," he said.

Several Orange County companies were victims of the carnage that hit Wall Street on Thursday and Friday. Of 100 local firms, losers led gainers by a staggering margin of 93 to 7 last week.

Among the losers were issues in the already hard-hit technology group, including AST Research Inc. whose stock slipped $1.125 a share in over-the-counter trading to close Friday at $11.375. MSI Data Corp. fell $1.25 on the American Exchange to $9.875 a share. And Western Digital Corp., also traded on the Amex, slid $1.125 to close Friday at $12.875 a share.

Several New York Stock Exchange listed-financial institutions got clobbered, including Far West Financial Corp., which fell $2.75 to close the week at $11.375. Downey Savings & Loan Assn. closed at $18.75, off $2 a share. Mercury Savings & Loan Assn. slid $2.25 to $12.625 a share. And Financial Corp. of America fell $1 to $7.50 a share.

Some recently run-up stocks took a drubbing, too. AFG Industries Inc. fell $4 on the NYSE to close Friday at $27.25. ICN Pharmaceuticals Inc. dipped below the $20 a share mark on the Big Board to close Friday at $19.75 a share, off $2.75 for the week. Friday's close represents a $10.50 a share drop since the peak of the August buying frenzy which drove ICN to a new 12-month high of $34 a share.

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