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Should you buy a reborn Enron or Adelphia?
These poster children for corporate greed will be coming out of bankruptcy with some parts going public. Investing in Enron (or a successor) might be dicey. Adelphia has real assets that might offer the investor opportunity -- if it isnt sold first.
By Michael Brush
Over the next several months, two poster children from the bad old days of corporate greed and corruption -- Enron (ENRNQ, news, msgs) and Adelphia Communications (ADELQ, news, msgs) -- may be rolling out of bankruptcy and back onto the stock exchanges.
Scrubbed clean of their burdensome debt loads, they might make for juicy investments. After all, the low debt levels of companies emerging from financial ruin often give them a leg up on competitors.
For a little proof, look no further than that formerly troubled discount retailer, Kmart Holding (KMRT, news, msgs). Kmart emerged from its financial disaster with a stock price in the mid-teens in early 2003. It recently traded near $77, rewarding shareholders with 340% gains in little over a year.
Thats not bad, to put it mildly.
But dont expect similar gains from Enron, which will likely be a disaster once again for shareholders after it emerges from bankruptcy. The reason: The company probably will contain little more than a collection of unattractive foreign power plants and natural-gas pipelines.
Shareholders in the new Adelphia, by contrast, could stand a fighting chance. Thats because the company will hold an assortment of valuable cable assets around the country. (Current shareholders in both companies, however, will get wiped out in the bankruptcy process, because, as a rule, thats what happens.)
Well take a closer look at the prospects for Enron and Adelphia, in a moment. But first, lets look at the high risk of investing in a company emerging from bankruptcy.
MCI and Global Crossing disasters
To see how badly you can be burned, look no further than two other hotbeds of corruption from the days of the bubble: telecom companies MCI (MCIP, news, msgs) and Global Crossing (GLBCE, news, msgs). Theyre down 40% to 50% since they came back as listed stocks near the start of this year.
What went wrong?
Blame the losses in part on the fact that very little capacity was taken out of the telecom market in the bankruptcy process. Instead, each of these two companies survived. Unlike a lot of industries where liquidation removes capacity, in the telecom area, weve had a lot of bankruptcies where the capacity stays in the marketplace, says Robert Rock, a telecom sector bond analyst at John Hancock Advisors.
The other culprit was those lighter debt loads MCI and Global Crossing enjoyed coming out bankruptcy -- the very levels of debt that were supposed to help. Because of their lower debt, MCI and Global Crossing could launch aggressive price wars. They got to fight another day, and the guys still in the marketplace were penalized because they still have debt on the balance sheet, says Rock. The price war has hurt most of the competitive local exchange carriers selling long-distance and data-transmission services. Shares of AT&T (T, news, msgs), for example, are down nearly 45% since the start of 2003.
Enron: It pays to look deeper
At first glance, it doesnt look as if Enron will run into a similar problem of overcapacity on its way out of bankruptcy. While much of Enrons energy-trading operations turned out to be a sham, the company held a collection of valuable natural-gas pipelines in Florida, Texas and California in a division called CrossCountry Energy.
And thanks to the high price of natural gas these days, pipelines in North America are in great demand. Its crunch time from the wellhead on down, says Merrill Lynch energy analyst Sam Brothwell.
But the problem for investors eyeing Enron shares post-bankruptcy is that most of these natural-gas pipelines are being sold off in the bankruptcy process, points out John Olson, a Sanders Morris Harris analyst who has followed Enron since its inception in 1985. Theyll be auctioned off to cover about $12 billion in claims from creditors. Another major U.S.-based asset to be sold is Portland General Electric (PGB, news, msgs), an Oregon utility.
What will be left? About a dozen natural-gas pipelines, power plants and electricity-distribution companies scattered around Latin America, the Caribbean, Europe and Asia. Theyll be packaged into a company called Prisma Energy International.
Olson says its too soon to know for sure that shares of Prisma Energy will ever be listed publicly. But he thinks the company will go public some time in the fourth quarter of this year. Thats because current Enron debt holders will receive equity in Prisma Energy as part of the bankruptcy settlement. Then, theyll gun for Prisma Energy stock to be listed, so they can sell it and reduce exposure to whats left of Enron.
But will it be a buy?
Olson doesnt think so. For one thing, many of Prisma Energys assets are in countries like Colombia, Argentina and Brazil, where political instability makes it tough to do business. Stu Wagner, a pipeline-sector analyst with the Denver-based brokerage Petrie Parkman & Co., also discounts the value of Prisma Energy -- and not only because of the political uncertainty. It will be a disparate set of businesses that are not well integrated, says Wagner. I am not optimistic that this will be a big turnaround story. I dont see it.
3 reasons Adelphia may be attractive
This cable company, once ruled by the Rigas family, is now being shopped around as part of a potential bankruptcy settlement. If the bankers cant get a price good enough for creditors, Adelphia will reorganize and come back as a listed company.
Its too early to know which way it will go, says Michael Embler, the vice president of the distressed-investment group at Franklin Mutual Advisors. But if Adelphia comes out as a public company again, it would be a potentially attractive stock for three reasons, he says -- depending on the price of the shares, of course. - The company has a decent collection of assets. By and large, a good percentage of their assets have been upgraded to digital, says Embler. They also have attractive markets in Los Angeles and Virginia. Those markets are desirable because the areas served by Adelphia are densely populated.
- Adelphias operating margins are relatively low. That sounds bad. But it also means theres room for improvement, which would boost the value of the company as gains played out.
- As a public company, Adelphia could be an attractive buyout candidate in an industry going through consolidation. There are not a lot of large cable companies left for the big guys to acquire, Embler says. Thats one reason Adelphia might get snapped up before it ever gets a chance to relist. I would be surprised if this company was out before the end of 2004, and it may never happen, says Embler.
One U.K. cable company that recently has come out of bankruptcy that Embler thinks is undervalued: Telewest Global (TLWT, news, msgs).
The post-bankruptcy checklist
To make the safest call on companies emerging from bankruptcy, its best to wait till theyre out and run through a checklist of tests to see if they may be winners. Our checklist, published last October, led us to the right choice with three out of four stocks on which we used it.
As the checklist predicted, both Washington Group International (WGII, news, msgs) and Chiquita Brands (CQB, news, msgs) have done relatively well, but McLeodUSA (MCLD, news, msgs) has not. Unfortunately, our checklist gave mixed signals on Kmart -- a thumbs up and a thumbs down -- and we decided to err on the side of caution. We went with a negative call on the retailer, missing the blue light special in its shares at the time.
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