Board OKs Williams Communications spinoff

(Telephony)The board of directors of Williams, the energy producer and transporter, approved the tax-free spinoff of Williams Communications to Williams shareholders on Friday, a day after Williams Communications shortened its funding gap with a $1.4 billion private debt sale.

The spinoff will be in the form of a dividend. Williams will distribute about 400 million shares, or about 95% of William Communications’ common stock it owns, to shareholders of Williams common stock on the record date of April 9. The distribution will occur on April 23. Williams owns about 86% of Williams Communications Group.

Based on the number of common shares of Williams stock currently outstanding, shareholders would receive approximately 82% of a Williams Communications’ share for every share of Williams common stock they own.

“The spinoff gives William Communications...the ability to attract investors who value the vast potential of broadband,” said a statement by Howard Janzen, president and CEO of Williams Communications. “Just as important, the move enables us to fortify our competitive advantage as the only broadband network services provider to focus on bandwidth centric customers, while not competing with them.”

The terms of the $1.4 bond sale say that if Williams Communications defaults on the bonds, which are due in 2004, its parent company will issue its own equity to debt holders. “Closing this transaction enhances our overall liquidity,” Janzen said.

Proceeds from the sale will be used for capital expenditures on telecommunications assets, the company said. In the past, Williams Communications’ executives said the company had a $3 billion funding gap. Since then however, Williams has increased a line of credit to $950 million, issued the $1.4 billion in private notes, and is in the process of selling its solutions business for about $400 million, analysts said.

“They took a big chunk out of [the shortfall],” said Vik Grover, analyst at Kaufman Bros. “They’re pretty much there.”

The spinoff and capital raising have done little to boost Williams Communications’ stock price, however, which has plunged to under $10 a share from a 52-week high of $52 a share. The unit has a market valuation of about $4 billion, and is forecasting network revenue growth of more than 100% in the first quarter and full-year revenue of about $1.3 billion. Williams Communications expects to be EBITDA-positive on an operational basis by the end of 2001.

“They’ve validated their transformation from a construction company to an operating company,” Grover said.

Some Wall Streets are speculating that once the six month waiting period required by the tax-free distribution arrangement is over, Williams Communications will be a prime takeover target for an RBOC. SBC Communications, an anchor tenant in Williams’ network, already owns 5% of the company.