Calling for Distinct AT&T; Consumer Unit

AT&T; Corp.’s board is scheduled to meet today amid rising speculation that the company will revise the structure of its planned combination with cable TV giant Tele-Communications Inc.

Many big institutional investors are clamoring for AT&T; to go much further than planned in carving out the cash-hungry consumer cable and long-distance businesses after the merger to protect the earnings of the profitable AT&T; business services unit.

Some investors now believe that AT&T; Chief Executive C. Michael Armstrong will propose exactly that to the board: Instead of owning a majority stake in the consumer unit, AT&T; would own a minority stake--somewhere between 25% and 49%. The public would own the rest.

That would shield AT&T; from having to consolidate the consumer unit’s earnings with the earnings of the rest of the business. Consolidation would mean significant “dilution” of the parent company’s earnings for several years--a prospect that has angered many institutional investors since the merger was announced on June 23.

AT&T;’s stock plunged from $65.38 just before the deal was announced to a low of $54.88 on July 2, a decline of 16%. But the stock has stabilized over the last week and rose 75 cents to $57.50 on Tuesday.

AT&T; initially proposed buying TCI in a stock swap, then issuing a “tracking” stock for the consumer business, which would allow Wall Street to put a value on that potentially fast-growing but capital-needy unit.

While AT&T; never formally specified how much ownership of the consumer unit the parent company would retain, Wall Street was guided to expect that AT&T; would own 70% to 80% of the unit, giving the public 20% to 30% via the tracking stock.

But many big investors have called that plan half-baked or worse. They have clamored to keep the two businesses distinct, at least for investment purposes.

A clean line of demarcation would allow the parent company to continue to post decent earnings growth and pay an above-average dividend yield on its shares, while the consumer unit’s shares would appeal to investors who want to take higher risk for a potentially faster-growing business in the long term.

“We’ve made it very clear what our position is,” said one major institutional shareholder of both AT&T; and TCI. “We have different portfolio managers with different needs.”

This investor expects AT&T; to buy TCI, then offer a redemption feature by which investors could choose which of the two stocks to own--the parent or the consumer unit.

AT&T; could retain its minority ownership stake in the consumer unit via a convertible preferred stock, which would have tax benefits for both the parent and the consumer unit.

And if AT&T; doesn’t structure the deal to limit its stake in the consumer unit? “Then Wall Street will hate it [the merger],” the investor said. More worrisome, the investor said, “Leo and Malone will hate it,” referring to TCI President Leo Hindery and Chairman John Malone.

They are expected to invest heavily in shares of the consumer unit whose business they will help run, and perhaps invest less in the parent’s shares.