Three Steps Back to Pittston

The rising appeal of tracking stocks displays all the earmarks of a full-blown fad--including excess.

Finance executives inclined to jump on the tracking-stock bandwagon should first consider recent events at The Pittston Co. In December, Pittston announced plans to abandon three tracking stocks in favor of a conventional single issue. This retrenchment supplies a cautionary tale about what can go wrong when tracking stocks falter.

In the newest wave, companies issuing tracking stocks, or planning to, include AT&T, SBC Communications, Microsoft, Excite@home, Staples, J.C. Penney, Office Max, Pearson, Cendant, Aetna, and Countrywide Credit Industries, the biggest U.S. nonbank mortgage lender.

More than 40 tracking issues are now trading, and the enthusiasm might soon spread to other countries: Japan’s Keidanren, a federation of economic organizations at the heart of Japan Inc., began pressing the Tokyo government late in November to permit Japanese corporations to issue tracking stock.

At Pittston, however, enthusiasm has vanished. An old-line Appalachian coal company that diversified into services a generation ago, Pittston, based in Glen Allen, Virginia, set up tracking stocks in the mid-1990s to highlight its Brink’s and Burlington Air Express operations. Pittston Brink’s Group delivers money in armored vehicles and has a flourishing home-security business. Burlington, now called Pittston BAX Group, is a freight hauler and forwarder.

Pittston’s third tracking stock, Pittston Minerals, is its old mining side. Of Pittston’s $4 billion in revenues for the 12 months through last September, BAX accounted for 49.6 percent and Brink’s for about 40.1 percent. The coal business, once Pittston’s main operation, now barely exceeds 10 percent of revenues.

These tracking stocks added considerable market value until 1998. First BAX began to slide. Then Brink’s, the most profitable of the three, turned down early last year. By last fall, Pittston saw its market capitalization halved, to barely $1 billion.

In December, Pittston chairman and chief executive officer Michael T. Dan told securities analysts that the tracking-stock structure wasn’t working anymore. In conjunction with efforts to sell the coal mines, Dan decided to fold the tracking stocks back into a single corporate issue. Without the coal business, Dan reckons Pittston’s service arms would have generated $400 million of cash flow on $3.6 billion in revenues in 1999.

“Pittston’s tracking- stock structure was very successful in enhancing shareholder value when it was first introduced in 1993 and expanded in 1996,” Dan told shareholders last December. “However, given our substantial legacy costs, as coal-market conditions have continued to weaken and the profitability of our coal business has deteriorated, the tracking- stock structure has not resulted in appropriate valuations of our three stocks.”

Says Sandy Katzler, a Standard & Poor’s Corp. analyst: “The coal liabilities had begun to cast a shadow over the other two businesses.”

Rooting Interest

For issuers, a tracking stock provides a way to showcase an exciting, high-growth business unit that might otherwise go unnoticed amid the company’s other operations. What investors may not realize, however, is that they don’t own shares in the units directly (see “On The Right Track?”) Shareholders receive financial statements for the tracking-stock units, but they actually own shares in the parent.

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