Salomon Smith Barney
to co-manage a private placement for its
division. The move is the second in a procession of steps aimed at eventually spinning off or selling the struggling computer chain.
Late last year Tandy obtained an independent line of credit for Computer City, the first move toward weaning the computer business from its financial dependence on its parent.
"Hiring investment bankers is the second step," says Martin Moad, Tandy's director of investor relations. "Then we'll look for a final separation." He says the company is considering a spinoff, a sale, or a rights issue, which would offer existing shareholders the right to purchase shares of Computer City's common stock at some point in the future.
The money will be used to help turn around the ailing 91-unit Computer City chain, which is expected to rack up almost $20 million in operating losses in 1998, according to Moad.
Since it has no earnings, some analysts and investors are valuing Computer City at roughly half of competitor
price-to-revenue measure. CompUSA trades at 0.65 times sales, thus Computer City's valuation would be about 0.32 times sales, or roughly $5 a share -- which takes into account the 20% of the company owned by insiders. Computer City's sales are about $1.9 billion. Tandy has about 100 million shares outstanding.
It's unlikely that Tandy will ever recoup the more than $100 million it has lost on Computer City since its 1991 inception. Still, investors are thrilled that management is casting off what they consider a black hole. "Who cares if you take a loss," says one longtime Tandy shareholder, who recently bought more shares and asked not to be identified. "If the business is worth anything, that's a positive."
Since Nathan Morton, the former CompUSA chairman and chief executive, joined Computer City in July as co-chairman, the division, which accounted for more than one-third of Tandy's estimated $5.2 billion in sales last year, has been making small steps toward profitability. In January, Computer City reported sales increased 5% to $164.6 million. Another confidence booster is that Morton and two other top Computer City executives own 20% of the company through
Tandy, led by Chairman and Chief Executive John Roach, has a checkered past of sinking money into new businesses only to watch them fail. In 1996 the company spent $170 million to close 21 money-losing Computer City stores, all of its 19
superstores and the entire 53
By early last year, after watching Tandy's stock stall, shareholders had had enough. Some were calling for Roach's resignation. Many were enraged by what they termed a crony board of directors that backed Roach despite his failed projects.
Lou Ann Blaylock, Tandy's vice president of corporate relations, says the company has taken steps to address those complaints. She points to the addition in July of Ronald Elmquist, a
executive, to its board of directors. She notes that Campbell has won top honors for its corporate governance in the
survey for the past two years.
As long as Tandy's stock continues to move up -- it has gained 72% in the past year, compared with 30% for the
-- investors will be less concerned about the board's inbreeding. "I don't care about the board as long as they're making the right moves," says Barry Arnold, principal of
Arnold Investment Counsel
in Milwaukee, which owns 80,000 shares of Tandy.
In addition to the planned divestiture of Computer City, those moves include a promise to remain focused on the profitable 6,900-unit
business, led by Leonard Roberts, who also is president of Tandy. The company plans to open about 100 RadioShack stores this year, and says it will use part of the $400 million in operating cash flow generated by the chain to continue buying back stock. Since 1990 Tandy has reduced the number of shares outstanding to 107 million, in the most recent quarter, from 160 million.
Furthermore, the company will likely build on successful alliances with
for store-in-store concepts. Although analysts say it's too soon to quantify the impact of those deals on RadioShack's revenues and earnings, most expect them to add to the bottom line. "RadioShack's telecom business has been posting double-digits gains since the spring roll-out of their Sprint concept," says Scot Ciccarelli, an analyst with
Gerard Klauer Mattison
in New York. He rates Tandy a hold, because he says the stock's recent run has made it expensive. (His firm hasn't performed underwriting services for the company.)
Dallas-based Tandy, which began 75 years ago as a buggy whip manufacturer, has a history of metamorphosis. In the 1960s, under the guidance of founder Charles Tandy, the company dived into consumer electronics by purchasing then nine-unit ham-radio retailer RadioShack.
Roach has continued that legacy with dreams of turning Tandy into a consumer electronics conglomerate. Despite promises to steer clear of new business, the company is currently experimenting with a concept called
. With one store in Denver and another in Atlanta, the 20,000-square-foot concept is catering to a niche market of specialized electronic equipment like resisters. "It's merchandise you won't find at RadioShack," Moad says, adding the company may open two more stores this year. RadioShack stores, by contrast, are about 2,500 square feet.
Despite Tandy's already steep stock climb and the possibility that it might once again spend shareholders money on risky new ventures, several investors say Wall Street is undervaluing the company.
The shareholder who has recently been adding to his position says
estimates of $2.13 per share in 1998 are low, because they don't factor in the share buyback program or the Compaq deal. Furthermore, he says, since Tandy doesn't explicitly break out RadioShack's numbers, analysts must estimate that business' profitability. When Computer City is divested by the end of this year, Wall Street will have a better idea of RadioShack's earnings power. He says the division, buoyed by the strength in the telecommunications business and a potential windfall from falling costs on batteries and other accessories that it buys in Asia, could earn as much as $2.80 a share next year.
He has a 12-month price target of 60 for Tandy, which closed Wednesday at 41.