Companies have used all manner of accounting tricks to boost their reported earnings over the past few years and, if you believe Quanta Services, ( PWR) that's exactly what's going on in Utilicorp's ( UCU) bid to wrest control of Quanta's board. But others say Quanta is merely using the "A" word to taint Utilicorp's objectives. "UtiliCorp wants to assume control of the Quanta board so that it can achieve accounting consolidation, enabling it to reflect non-cash earnings that would help it meet market expectations," said Quanta CEO John Colson in a letter to Utilicorp's CEO Robert Green. Quanta, a provider of services to the energy and telecommunications industries, and its majority shareholder UtiliCorp had been in discussions for several months to consolidate financial results, but talks were recently abandoned for a second time. UtiliCorp has said it intends to nominate an opposition slate of directors for Quanta's board and will canvass Quanta stockholders to assess their views concerning the strategic direction of the company.
Gordon Howald, an analyst at Credit Lyonnais Securities, said the consolidation of Quanta's earnings would enable Utilicorp to avoid the double taxation currently experienced under the equity earnings method. Utilicorp, which currently owns 38% of Quanta, can consolidate results if it has control of the board or has a 51% ownership. Howald projects that the consolidation method of reporting would add about 9 cents to Utilicorp's earnings for 2002 and roughly 12 cents a share, if Utilicorp were able to increase its ownership to 50%. Those calculations assume a 12% decline in Quanta's earnings this year. Utilicorp has said previously it expected a combination to be accretive by 12 cents a share. Still, the consolidation of results would have no impact on Utilicorp's cash flow. "It doesn't seem like there's much business synergy. Utilicorp wants to consolidate results for accounting purposes to boost its earnings," said Morgan Stanley analyst Chris Gutek. In a 13D filing, Utilicorp admitted that it wanted to control the company in order to consolidate financial statements but the firm also said Quanta's disappointing financial performance prompted it to re-evaluate its prior support of the firm's board of directors.
Nothing to See
Despite Quanta's claims that Utilicorp is trying to "push its accounting agenda," analysts are not convinced the company is doing anything untoward. "I hardly believe this potential consolidation has anything to do with accounting trickery," noted Howald. "Yes, the additional earnings would be helpful to any company, but if you were UCU, and your investment value had declined significantly, you too would want additional control." While shares of Quanta jumped 15% Monday on word of the filing, the stock has been struggling recently amid a slowdown in the telecommunications market. In fact, shares fell 52% last year alone. In its most recent quarter, Quanta posted a 36% drop in net income. "Accounting has become a bad word," said Jeff Brotman, adjunct professor of accounting at University of Pennsylvania Law School. "It seems like Quanta is trying to scare the shareholders. This is legitimate and sound, as long as the underlying business economics are there." Howald said a combination of the two companies would benefit Utilicorp in a number of ways. "While this is not UCU's core business, the value of its (Quanta) investment is a consideration for UCU shareholders," he said. "Quanta's balance sheet is attractive, as is UCU's balance sheet." Edward Jones analyst Brian Youngberg said Utilicorp "just feels they'd be able to run the company better" and that by consolidating operations "they believe they can derive greater value for shareholders." Still, analysts note that a takeover by Utilicorp faces a number of hurdles. While the company needs to acquire only another 12% of Quanta to gain control, it may have trouble winning shareholders over, as it is not offering a premium over the current share price. In addition, while Utilicorp has said it may put Quanta up for sale, some analysts say they are hard-pressed to think of anyone, other than Utilicorp, that might want to acquire Quanta right now given the industry it is in. Utilicorp's move suggests there is value in Quanta's business, however, which perhaps explains the stock's surge on Monday. Quanta rose 9% to 13.30 while Utilicorp inched down 0.09% to $22.72.