Communications Satellite Corp. yesterday took initial steps to restructure significantly its investment base, announcing plans to buy up 20 per cent of its outstanding common stock and to sell a "substantial" amount of debt offerings in the future.
The decision by Comsat came in the wake of a federal court decision, upholding Federal Communications Commission authority to assume that regulated utilities will be financed by a mixture of stocks and debt.
In effect, the federal regulatory policy encourages companies to borrow money to reduce current costs. As a result, Comsat's virtually unique status among big corporations as one free of debt, will end.
Since it was founded here in 1962, Comsat has maintained an all-equity (stock) financial structure. According to a decision last month by the U.S. Court of Appeals here, this has resulted "in an inordinately high cost of capital, since the cost of equity is generally higher than the cost of debt, and almost all public utilities carry some debt."
Although the court found that Comsat's management obviously could decide to continue an all-equity base, the Oct. 14 decision stated that in so doing, Comsat would be "consciously accepting a lower rate of return for tis stockholders, possibly in the interest of preserving for them a low level of risk."
To emphasize its conclusion, the court said the FCC should develop a formula under which Comsat's rate of profitability on investment should be lowered over a period of years if Comsat still has no debt.
The basic thrust of the FCC's action, said the court, was correct in deciding that comsat could reduce costs with debt offerings and thereby serve consumers of international satellite communication by charging lower rates.
Although Comsat announced earlier it would appeal the Court of Appeals decision, which upheld in part an FCC order for Comsat to cut international rates, yesterday's action by the Washington company moved in the direction of complying with FCC mandates.
Specifically, Comsat said it would:
Make an offer to purchase 1.5 million shares of common stock at $37 a share in cash; the company may elect to buy up to an additional 500,000 shares for a maximum buyout of 2 million shares (20 per cent of those outstanding);
Keep the offer alive until an exploration of 5 p.m., Central Standard Time, on Dec. 6. If more than 2 million shares are offered, Comsat will make purchases on a pro rata basic - except the all shares by owners of Time, on Dec. 6. If more than 2 million shares are offered, Comsat will make purchases on a pro rata basis - except that all shares by owners of record Nov. 11, with 10 shares or less, will be purchased;
Consider borrowing funds to buy shares if more than 1.5 million are offered; to implement short-term borrowings for this purpose an application was filed with the FCC, seeking approval for an initial borrowing of up to $25 million;
Select First Boston Corp. to act as dealer manager for the offering; brokers and banks will be paid solicitation fees of 30 cents a share subject to a maximum of $5,000 in fees for any single stockholder's sale.
Obviously attracted by the $37-per-share purchase price, investors yesterday scrambled to buy shares of Comsat and the New York Stock Exchange price jumped $3.625 a share to close at $36. Comsat stock had plummeted to a low of $28.375 in the wake of the court decision and its high for the year was $37.375.
Comsat said its board determined that a purchase of stock is "an appropriate use" of cash, that it will have a favorable effect on earnings per share and book value per share with fewer shares outstanding, and that the stock will be available for future acquisitions although none are pending.
In the future, Comsat said, it will develop "a substantial amount of debt" in its capital structure, "consistent with the FCC's position."