Salomon Smith Barney Touts Williams Equity Trade

  • 12 Mar 2001
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Salomon Smith Barney is pitching an equity derivatives trade designed to isolate the energy assets from telecom and energy conglomerate Williams and capitalize on their relative cheapness.

One of the strategies that Amir Heravi, equity derivatives analyst at Salomon Smith Barney in New York, recommends is buying Williams [WMB, USD46.10], selling Williams Communications [WCG, USD13.53], and buying puts on a basket of energy equities. Williams is an energy and telecommunications conglomerate that owns 86% of Williams Communications stock.

Williams plans to issue to its shareholders shares of Williams Communications following a complicated exchange of assets for shares between the two entities. Investors will receive 0.88 shares of Williams Communications for every share of Williams they own now. Buying one share of Williams and selling 0.88 shares of Williams Communications now is a means of stripping away the expected Williams Communications component from the Williams shares and isolating the energy assets. This sort of a trade is known as a "stub."

Although the company has not decided for certain whether it will go ahead with the deal, Heravi said the spin off is expected to happen by the end of June. Heravi believes that Williams is trading at a significant discount compared to its industry peers. The consensus 2002 P/E ratio for Williams is 13.7, as opposed to an average of 22.8 for a basket of energy companies that includes Duke Energy, Dynegy, El Paso Energy, and Enron.

One of the bank's recommended strategies is to go long the stub and sell an equal notional value of the energy basket. The basket can be sold by buying puts on the four energy stocks, or by shorting them in the cash markets.

  • 12 Mar 2001

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