December 18, 2000
MAINE STOCK TRENDS
Shareholders pay a price for the American Skiing - MeriStar merger
Copyright © 2000 Blethen Maine Newspapers Inc.
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The headline said "American Skiing to Buy MeriStar Hotels" but it sounded more like the classic "Man Bites Dog" headline, with MeriStar Hotels & Resorts (MMH-2.44) ending up the survivor. American Skiing Company (SKI-$1.56) offered 1.88 shares of its stock for each of the outstanding shares of MeriStar Hotels, of Washington, D.C. MeriStar operates 231 hospitality and leisure properties, but doesn't own them. The deal is expected to close this winter.
When MeriStar's stock price and market capitalization are factored with the price of American Skiing's stock and management changes, the deal begins to look less like an acquisition of MeriStar and more like an obituary for American Skiing shareholders.
While American Skiing is the surviving entity, little else remains of the company that shareholders once knew. First, the corporate name will change to Doral International, Inc. Second, Les Otten becomes chairman, a position of questionable power given that he can only name himself and one other American Skiing director to the new board. MeriStar President Paul Whetsell will become CEO. Whetsell presently sits on American Skiing's board of directors. MeriStar's Chief Investment Officer will become the Chief Financial Officer of Doral.
The press release states "Otten will oversee strategic planning." But — again according to the release — he will not be heading up any of the four strategic divisions that report to Whetsell. Approximately 49 percent of the new company will be owned by Oak Hill Partners, which, not surprisingly, already own a chunk of stock in MeriStar. The company's headquarters will move from Maine to Washington, D.C.The positives of the transaction are that the new company will have stronger cash flow, and its business will no longer be so dependent upon skiing. There should also be some cost savings.
American Skiing shareholders will pay a steep price for these benefits. Investors who purchased stock at the initial public offering in November 1997 have seen their original investment fall from $18 per share to an all time low of $1.50 per share after the deal was announced. That is a drop of more than 90 percent in just three years. And the near wipe out of shareholders goes much deeper. When the company went public, there were two classes of stock: 14.76 million shares of Class A stock owned by Otten (which controlled most of the voting power) and 14.75 million shares of common stock that was issued to the public in the offering.
For their $265 million, the common shareholders did not end up with all of the assets needed to operate the company, though. The land underlying the snowmaking ponds at Sunday River resort together with water rights remained with Otten who leased them to the company. When Oak Hill came in as an investor, they put an end to that. As part of the transaction, American Skiing acquired these for $2.1 million. American Skiing also acquired additional property and land at Sunday River from Otten for another $679,000. American Skiing then paid Otten another $650,000 for an option to purchase 3,300 acres of abutting land at Sunday River for $3.692 million.
The common shareholders got it again, when in 1999, American Skiing was forced to turn outside for additional equity. It came from the Bass family' s Oak Hill Capital Partners, L.P. $150 million of Class B preferred stock in 1999 and an additional $13 million in the form of a credit loan tranche this year. The terms that Oak Hill negotiated with American Skiing allowed the preferred to convert into American Skiing common stock at a price of $5.25 per share. That meant 28.6 million shares of common stock, plus additional shares through accrued interest.
When the total amount of employee stock options (8,688,699) available is added to all of the other common stock to be issued in conjunction with the MeriStar deal, there becomes a potential total of nearly 125 million shares of American Skiing stock outstanding. That's before the 73,680,776 shares that are scheduled to be issued to MeriStar's common shareholders.
This means that a shareholder who purchased 100,000 shares in the initial public offering paid $1.8 million. That represented one third of one percent ownership in the company. As of last Friday, that $1.8 million investment was now worth just $156,000 and it now constitutes an ownership percentage of merely eight hundredths of (8/100ths) of one percent in a company that has never earned money as a publicly traded company and a company that has paid its president and chief executive officer more than one million in salary since going public plus stock options, plus a bonus, plus directors fees and that has paid him millions of dollars for assets that are vital to the company and that were withheld from the company in the initial public offering. Shareholders lost more than 90 percent of their investment and saw their ownership interest diluted by an additional 73 percent. American Skiing's stock performance significantly underperformed the Standard & Poor's 500. It also significantly underperformed its peers in the ski industry.
And what did The Street think of the proposed deal? American Skiing stock fell 43.2 percent for the week. MeriStar, for its part, received two downgrades from analysts, which is a bit unusual for a company whose share price should only go up in a merger, right?
Don't get us wrong. We have a great deal of respect for Mr. Otten. He almost single handedly put Sunday River on the roadmap. He's been a brilliant entrepreneur and marketer. But, as the chairman and CEO of a publicly traded company in which he began with majority voting control, his own hand picked executives, hand picked board of directors, and hand-picked portfolio of ski resorts, someone has got to show us what in the world the poor shareholder has gotten out of all of this except for a big tax loss.
On the subject of high finance, another local company took it on the chin last week, although not anywhere near as bad as American Skiing. Banknorth Group (BKNG-$18.00). saw its stock downgraded from "buy" to "hold" by PMG Capital, which helped to send the stock tumbling 14.5 percent. Insiders continue to cash in on the bank holding company's highest stock price since 1998. Director David Hindle sold another 19,100 shares. Director George W. Dougan sold 82,733 shares. Executive Vice President John Fridlington sold another 65,302 shares.
The stock of Fairchild Semiconductor (FCS-14.82) fell13.8 percent last week. We couldn't find any news on the company other than a new product introduction. But, year-end tax loss selling along with downgrades for tech industry leaders such as Microsoft and Sun Microsystems sent just about every tech stock in the world lower last week. Next year's consensus earnings estimates still seem to be hanging in there at $3 per share for Fairchild.
Intelligent Controls (ITC--$1.50) had a good week last week. The Saco-based manufacturer of underground storage tank monitors and line leak detectors only moved up a quarter of a point, and without news, but that was good enough for a 20 percent increase, which made it last week's top performing local stock.
First Coastal Corporation (FCME-9.00) DID have news. The Portland bank holding company announced an extension of its stock repurchase program in which the company expects to repurchase an additional 62,000 shares of its common stock representing approximately 5 percent of the 1,232,489 shares currently outstanding. As of November 28, 2000, First Coastal had repurchased a total of 12,038 shares of its common stock through a stock repurchase program. An additional 7,962 shares are still available for repurchase through that program.
Another company that one would think would be repurchasing its shares, but hasn't is IDEXX Labs (IDXX-20.88). Over the past year and a half, the company has repurchased 7.1 million of its shares. 6.9 million were repurchased through September 30, 2000 according to the company.That means just 200,000 have been repurchased with the stock at the low end of its trading range for the year.
IDEXX announced last week that its IDEXX Veterinary Services, Inc. subsidiary has entered the digital radiography business through an agreement with Orex Computed Radiography Ltd. Under this agreement, computed radiography products developed and manufactured by OREX will be sold in the veterinary market worldwide, exclusively by IDEXX. The computed radiography system to be sold by IDEXX eliminates the need for conventional film and chemical-based darkroom processing, and allows veterinarians to digitally store, enhance, and transmit images. The system, which IDEXX expects to introduce in early 2001, is the first affordable system customized for use by veterinarians.
The company also held a conference call Wednesday for the purpose of updating investors on product development in pharmaceuticals and other areas.
Good news at UNUMProvident (UNM-$26.69) didn't do much to help the stock price of the world's leading disability insurer. The stock actually fell 4.26 percent last week. The company announced an anticipated $75 million after tax gain as a result of restructuring certain liabilities in its retirement plan. Deutsche Bank Alex Brown initiated research coverage of UNUMProvident stock with a "buy" recommendation.
Good news didn't help ImmuCell Corporation (ICCC-2.00) either. Last week, the company announced the acquisition of MASTiK(TM), Mastitis Antibiotic Susceptibility Testing Kit. As far as the pharmaceutical and diagnostic test kit market goes, it wasn't what they call a blockbuster transaction. To secure the acquisition, ImmuCell had to come up with all of $35,000 on closing for the rights to the product and a related patent. That will be followed by another $40,000 by July 2, 2001 to maintain ownership of the product. The patented product helps veterinarians and producers quickly select the antibiotic most likely to be effective in the treatment of individual cases of mastitis presented to them. MASTiK can usually provide this answer in less than one day, dramatically faster than the other commonly used antibiotic susceptibility testing practices.
Mastitis is one of the most costly disease conditions in animal agriculture. Losses to the dairy producer result from the need to discard mastitic milk and to discard milk from antibiotic-treated cows. Estimates of the economic impact of mastitis in the U.S. range from approximately $1-2 billion annually. For the week just ended, ImmuCell stock fell 5.88 percent. On Friday, the stock traded as low as $1.88 per share. That's the lowest since last December 29, just before the stock got caught up in the first quarter biotech stock boom, which subsequently carried the stock price to a high of $9.97 on March 10, 2000.
Brad McCurtain is president of Maine Securities Corporation. Maine Securities Corporation is an investment firm specializing in Maine's securities. From time to time, the corporation, its employees, and its clients may buy, hold, and/or sell positions in companies mentioned herein. As a regulated securities broker/dealer, the company and its employees are required to abide by all securities regulations at all times when communicating with the public. Brad McCurtain may be reached at info@MaineSec.com. Web site: http://www.MaineSec.com