UTStarcom: Better To Sell It Before The Company Sells Itself?

As I reported yesterday, UTStarcom (UTSI) has announced that it had hired Merrill Lynch to study “strategic alternatives” for enhancing shareholder value. They put up a “For Sale” sign, basically. The stock initially jumped on the news, but has since given back most of the gains, and will finish today up just a nickel. There are several reasons for the lack of enthusiasm on the Street for the company’s move.

One, the stock had already been moving up, and had gained about 50% since early August. Two, as I noted yesterday, the company assigned Ying Wu, the current head of UTStarcom China, to work with the special committee studying the company’s strategic alternatives, but that the company will not follow through on previous plans to make him CEO January 1. He was supposed to succeed current CEO Hong Lu. The company says Lu still intends to step down - so who the CEO will be remains a mystery. And three, there’s no real evidence that there’s a lot of value left to capture.

Bill Choi, an analyst with Jefferies, said in a note today that he thinks the company is more likely to dispose of some businesses than sell the whole company. Choi thinks the company has “acquired its way into too many disparate businesses.” Choi sees two attractive businesses in its Fixed Mobile Convergence and IPTV units, but note they contribute less than 10% of revenue and “could be difficult to unwind and separate out from the rest of the businesses.” He says the the company’s cell phone manufacturing and infrastructure businesses “lack scale in a highly competitive market and generate low margins.” He does a sum-of-the-parts calculation, and comes up with a value of $10 a share, just a hair above the current stock price. He continues to rate the stock “Hold.”

Lawrence Harris, an analyst at Oppenheimer, says UTStarcom’s options include an outright sales of the company, the divestiture of divisions or product lines, or an internal restructuring. Harris has a Sell rating on the stock, and asserts that the company’s fundamental outlook remains “cloudy” with issues in each of its major businesses.

The biggest slice of the company makes handsets and infrastructure using the PAS (Personal Access Systems) wireless phone standard, which is used in some parts of China. He notes that PAS equipment accounts for 35% of revenue and 75% of gross parofits at the company; PAS handset sales fell 26% in the second quarter versus last year, and PAS infrastructure fell 41%. Harris notes that the company’s Personal Communications Division, which makes cell phones, has produced “disappointing” gross margins in recent quarters, below 5%. He asserts that its third primary business, Broadband equipment, has produced disappointing revenues in recent quarters.

With a weak fundamental story, no clear CEO succession plan, and the possibility that there may not be much upside in the plan to enhance shareholders value, it’s not an especially appealing stock.

UTStarcom shares today gained 5 cents to $9.79, after trading as high as $10.10 earlier in the day.