AT&T; BREAKUP II : INVESTORS : Firm Now Has a Chance of Reaching Value Potential : Market players have reason to bet that the change can only be positive.
Two months ago, the investment committee at Cincinnati-based Midwest Group Financial Services grilled portfolio manager Susan Flischel over why she was still holding 75,000 shares of AT&T; in two mutual funds.
“We’d stuck with it through thick and thin,” she recalled Wednesday, the day her long-term bet on the giant telecommunications company paid off. The company’s announcement Wednesday that it will split into three discrete entities represents the best chance in years for shareholders to realize AT&T;’s market potential.
“All the parts of AT&T; will now be valued more like their peers,” said Charles Mayer, manager of Invesco’s Industrial Income Fund, which has accumulated about 1.4 million AT&T; shares over the last six months.
That revaluation began almost instantly, as AT&T; shares rose $6.125 on Wednesday to $63.75 in New York Stock Exchange trading. Although a major restructuring of the company had been expected all summer--with most speculation centering on a spinoff of the company’s moribund computer business--the size of the rally demonstrated that almost no one anticipated a move of this scale.
Mayer and other investors are betting that the change can only be positive. Since the original breakup of AT&T; in 1984, when Ma Bell spun off seven regional telephone companies--the so-called Baby Bells--the larger parent has lagged in stock market performance. (On Jan. 1, 1984, AT&T; holders received one share of each of the Bells for every 10 shares of AT&T; they owned.)
“When it first split up, AT&T; was the one company we sold off,” recalled Bruce Behrens, co-manager of Baltimore-based Flag Investors Telephone Income Stock Fund. Starting in 1989, the fund rebuilt its position in AT&T; to the point where it now owns about 700,000 shares, he said.
Investors expect AT&T;’s market value to brighten for several reasons. One is that the strengths and weaknesses of the split-up businesses will be far easier to appraise than those of the combined company.
“It definitely has been hard to analyze AT&T;, because you had to look at all the pieces,” Flischel said.
If each piece is revalued in comparison to similar companies, their prices should rise. At Tuesday’s close, the last before the breakup announcement, AT&T; shares traded at a price equivalent to 18 times per-share earnings.
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By contrast, companies such as Motorola, Finland’s Nokia and Sweden’s Ericsson--all of which will be competitors of AT&T;’s spun-off telecommunications equipment business--trade at better than 25 times earnings.
“The equipment business is worth more independently to the investor than it is bottled up with the long-distance business,” said Howard Gleicher, a portfolio manager at Pelley-Needleman Asset Management in Newport Beach, which owns more than 1 million AT&T; shares.
Shareholders are also pleased that the breakup will allow them to uncouple AT&T;’s profitable units from one of its biggest mistakes: the acquisition and subsequent mismanagement of NCR Corp., the computer maker AT&T; bought in 1991.
NCR, since renamed AT&T; Global Information Solutions and now due to be spun off on its own, has turned into a major drag on the parent’s earnings. That accounts for a good measure of AT&T; stock market underperformance over the last two years.
From September, 1990, through August, 1995, for instance, AT&T; narrowly tracked the Standard & Poor’s 500 index, rising 110% in total return (including reinvested dividends), compared to the S&P;’s 112%.
From the end of 1993 on, a period that coincided with mounting profit problems at NCR, AT&T; gained only 6.8% while the S&P; rose more than 20%. Only since the end of June, as Wall Street began to hear rumors that GIS was to be spun off, did AT&T; stock take off--rising 9.7% from July 1 through Tuesday.
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Investors on Wednesday were viewing GIS as the poor relation among the three AT&T; offspring.
“GIS might stay in our equity fund portfolio, but I’ve got my doubts,” said Flischel, who as a Cincinnati-based money manager is intimately aware of problems at GIS, which is based in nearby Dayton.
“They’re just not real progressive-thinking on the technology side.”
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How Bell Investors Have Fared
Investors who held on to all of their original Bell System stocks since AT&T;’s divestiture on Jan. 1, 1984 have generally beaten the average stock’s price gain since then, as measured by the S&P; 500 index. But AT&T; itself has risen less than most of the Baby Bells, and slightly less than rival MCI Communications. (Returns below do not include dividends.)
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Price gain Stock since Jan. 1984 SBC Communications +457% Ameritech +385% Pacific Telesis +355% BellSouth +289% Bell Atlantic +276% AT&T; +259% US West +251% NYNEX +216% MCI Communications +260% S&P; 500 +251%
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Note: Pacific Telesis gain includes AirTouch spinoff.
All prices are adjusted for any stock splits.
Source: Value Line Investment Survey; Bloomberg Business News
AT&T; stock (quarterly closes, except latest): Wednesday: 463.75, +6.125
