The Centel Sprint Deal: It's High Anxiety

As Centel Corp. shareholders go, Robert L. Hutt is small fry. But that didn't stop the Chicago-based phone company from calling him up, lobbying the Woodbridge (N.J.) financial-services executive to vote his 1,000 shares in favor of Sprint Corp.'s roughly $3 billion bid for Centel. Hutt's answer: No way. When the votes are tallied at a special meeting on Dec. 2, his will be counted against management. "It's a lousy deal that they're trying to shove down everybody's throat," Hutt complains.

That Centel would get such a snappish reaction to its get-out-the-vote campaign suggests just how tough it will be to sew up this merger. Both Sprint Chairman William T. Esrey and Centel Chairman John P. Frazee Jr. confidently predict victory in public, but Hutt's opinion suggests that high anxiety might be a more appropriate response.

`A SQUEAKER.' Indeed, despite efforts by Esrey and Frazee to court large institutional shareholders in person and on the phone, so far only one, Oppenheimer Capital, is publicly backing the plan. The rest either decline comment or say that they will vote no (table). The vote "will be a squeaker," says Oppenheimer & Co. sell-side analyst Michael Elling, who supports the deal.

Frazee had the right idea when he put Centel on the block, offering to sell it in whole or in parts, whichever would get the best price. But he made one big tactical error. He boasted in December, 1991, a month before putting Centel up for sale, that the company might be worth $65 a share.

That projection, along with the announcement of the auction, ran the stock up from the low 30s to a high of 46. It was still trading at 42 1/2 on May 27, when Sprint and Centel announced their tentative merger agreement. But instead of paying a premium, Sprint offered a stock swap--1.37 Sprint shares for each Centel share--that valued Centel shares 9 1/2 below the market price. Investors were shocked. The next day the stock plunged 10 1/2, to 32.

Frazee acknowledges now that his $65-a-share valuation pumped up investors' expectations unrealistically high. "I believed it at the time," Frazee says, noting that many Wall Street analysts were also quoting the same figure. "I can understand, though, why people might be irritated now." Although some investors hope that Sprint will sweeten its offer at the last minute, Esrey rules out that possibility.

There's some logic to a Sprint-Centel merger. Sprint is the No. 3 long-distance player, while Centel has strong regional properties in cellular. Both provide local phone service. The combined company would be the only one in all three communications businesses--a selling point to customers. But Centel shareholders feel that Sprint is getting Centel too cheaply, pointing out that American Telephone & Telegraph Co. is tentatively offering a 68% premium over the previous market price of McCaw Cellular Communications Inc. to take a one-third stake in the cellular kingpin. Frazee notes that Centel's rural properties are simply not as valuable as McCaw's, which are located in larger markets.

Maybe that's so. But not everyone believes that Frazee is a master negotiator: "If Centel went up for sale today, I think the price would be much higher," says Salvatore Muoio, an analyst at Gabelli & Co.

While Sprint shareholders also have to approve the merger, the big question is whether Centel holders will give their O.K. Because the deal requires a yes from a majority of all Centel shares, a low turnout could help send the measure to defeat.

That would be just fine with Moran Asset Management in Greenwich, Conn. The money management firm, with 500,000 Centel shares, has launched a proxy fight to combat the transaction. According to President Frederick A. Moran, Centel has been setting up as many roadblocks as possible. Centel wouldn't supply Moran with a shareholder list, for instance, saying it would mail out his proxy materials. And Centel at first said it would charge $130,000 for the mailing, a figure it later sliced in half.

BEST HOPE. Moran also charges that many of his proxies are taking too long to reach investors and that, in some cases, the prestamped voting envelopes were omitted. "This whole process is really pathetic," he complains. "The democratic process is being totally subverted in this case." Moran has asked Centel to delay the balloting and has complained to the Securities & Exchange Commission. Frazee denies any impropriety.

Strangely, enough, Frazee's best hope to defeat Moran and others lined up against the deal may turn out to be Sprint shareholders. The recent rise in Sprint's share price, to nearly 26 from a midyear low of about 21, has made the proposed share swap more valuable to Centel holders. Moreover, many investors who focus on the communications business have stakes in both companies. Oppenheimer, for instance, is supporting the transaction largely because in addition to its Centel stake, it owns 12.3 million Sprint shares. The question that will be resolved on Dec. 2 is whether there are more Oppenheimers or more Hutts among Centel shareholders.

      Sprint's purchase of Centel requires a yes vote of a majority of Centel shares. 
      Abstentions count as nos. Here's how the top shareholders stand
      Investor       Stake of shares  Voting
                           Millions  position
      GABELLI FUNDS           5.0      No
      OPPENHEIMER CAPITAL     4.6      Yes
      AETNA LIFE & CASUALTY   3.4      NC*
      CAPITAL GUARDIAN        2.4      NC*
      *No comment
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