Lin Broadcasting's stock shot up 25% Wednesday on speculation that one or more of the regional Bell telephone companies would bid against McCaw Cellular Communications for the New York-based firm.
Analysts said a few cable television companies and possibly GTE Corp. also would be interested in Lin's cellular telephone businesses. But, they said, the so-called Baby Bell companies--including Pacific Telesis, US West, Southwest Bell and BellSouth--are the only contenders with the financial muscle to top McCaw's $5.8-billion offer.
The offer by McCaw, which has a 9.8% stake in Lin and already is the nation's largest independent cellular firm, is by far the biggest takeover bid ever in the young cellular telephone industry. The $5.8-billion proposal amounts to $120 a share for the 90.2% of Lin stock that Kirkland, Wash.-based McCaw doesn't already own.
In over-the-counter trading Wednesday, Lin's stock rose $26 to close at $129.50, apparently on the expectation that a higher offer for Lin will emerge.
However, Geoffrey Johnson, an analyst with Argus Research in New York, said that "if the Bells are going to do anything, they have to do it quickly," He noted that McCaw said it would commence a tender offer promptly. "A tender offer is hard to beat, and whoever puts up a bid will have to deal with McCaw," he said.
Prepared to Fight
Lin is a good buy for McCaw, said David J. Boczar, an analyst with New Japan Securities-U.S. in New York. "Lin is the most profitable participant in the industry," he said. It has properties in all the right places, he said, noting Lin's presence in New York, Dallas/Ft. Worth, Houston and Los Angeles, where it owns 35% of Los Angeles Cellular Telephone.
"Los Angeles is the prize," Johnson said. With Lin, he said, McCaw "would own the entire California coast." McCaw already has cellular interests in San Francisco, San Jose and elsewhere in the state, including an indirect investment in Los Angeles Cellular.
Johnson said he believes that McCaw would match any offer from another bidder of up to $130 a share. "McCaw wants this company," he said.
On the other hand, Johnson added, the Baby Bells have some powerful incentives to stop McCaw.
"They consider telecommunications to be their business. They have some of the best cellular properties," Johnson said, and they may not want to see a company like McCaw "become an industry powerhouse."
More important, Johnson said, cellular phones are crucial to the Baby Bells because profits are potentially higher than in their regulated phone business.
"The outlook for telephones is limited, but cellular is the diamond in the rough," Johnson said. "It is the key to growth. It is where they want to be for the next 100 years."
Boczar added, "I don't think they want to participate with a larger McCaw. The ramifications are perhaps not evident now, but it will be five to 10 years from now."
However, analysts said the bidding for Lin, which last month announced plans to spin off its broadcasting outlets, may already have gotten too high for some of the phone companies.
Hot Professional Market
Most phone companies "are very conservative, and that may narrow the field," said Kenneth Leon, an analyst with Bear, Stearns & Co. in New York.
McCaw, on the other hand, "is very aggressive," Boczar said. "They do not appear to be overly afraid of increased leverage."
Analysts calculate that McCaw's offer for Lin is equal to $275 to $300 for each potential customer, what is known in the industry as a "pop." The cellular industry's basic financial yardstick, pops reflect market area populations multiplied by percentage ownership of the cellular systems serving those areas. British Telecom, which bought a 22% stake in McCaw in January, paid $140 to $150 a pop, according to analysts' estimates.
Analysts said McCaw made a fair price based on Lin's profitability, but the market clearly believes a higher bid is imminent, perhaps because of the growing popularity of cellular telephones among busy professionals.
McCaw and others also might be interested in Lin because of the company's hopes of acquiring cellular interests held by Metromedia Co. in New York and Philadelphia, said independent analyst Bradford L. Peery. Lin lost an initial court decision in its effort to go ahead with the acquisition but this fall a New York Court of Appeals will consider an appeal by the company.
A court victory could increase Lin's value by $30 to $40 a share, Peery said. Lin may be able to stall a buyout until the ruling is made in order to get higher price, he added.
Leon said Lin could also move quickly to sell off the company piece by piece to increase shareholder value.