A Tough Call for AT&T; Investors

By JAMES F. PELTZ

Oct. 26, 2000 12 AM PT

TIMES STAFF WRITER

AT&T; Corp. is testing the prowess, and the nerves, of investors from Main Street to Wall Street.

The telecommunications giant plans to break itself apart, again, with a plan that involves a complex program of issuing tracking stocks and spinning off divisions. As it stands now, the moves ultimately would create four separate stocks to represent AT&T;’s main businesses.

But the plan raises two basic and very prickly questions for investors, including the tens of thousands who own what is one of the most widely held stocks in the world. Will those four stocks be worth more than AT&T; alone today, and which of those stocks might fare better than the others?

There are no easy answers, as investors illustrated Wednesday by again punishing AT&T;’s already ailing stock. Investors also were annoyed that AT&T; posted lower third-quarter earnings Wednesday and predicted that its fourth-quarter profit would also trail expectations.

AT&T;’s stock tumbled $3.50 a share to close at $23.38, as 42 million shares changed hands in trading on the New York Stock Exchange. That means AT&T;, a venerable component of the Dow Jones industrial average, has plunged 54% so far this year, wiping out $105 billion of stockholders’ wealth.

This jaw-dropping decline put the pressure on AT&T; and its chairman, C. Michael Armstrong, to abandon their grand plans for a telecommunications and cable-television empire and instead use the breakup to get AT&T;’s value rising.

AT&T; has four main units: Its long-distance business, the nation’s biggest with 60 million customers; its wireless group, with 12 million customers; its business services unit, which provides voice and data services to companies; and its broadband piece, which includes the nation’s largest cable-TV operation that Armstrong assembled over the last two years with $100 billion in acquisitions.

When the dust settles two years from now, there would be four stocks:

* AT&T; wireless. It already has a tracking stock that traces the division’s performance, but the business would ultimately be spun off to AT&T; shareholders in a tax-free exchange as a separate entity with its own stock. Thus, anyone buying AT&T; stock now would get the chance to own AT&T; Wireless too.

* The consumer long-distance and business services groups would become the “new” AT&T;, represented by AT&T;’s existing stock. But the long-distance business would also get its own tracking stock.

* The broadband/cable group would eventually be spun off, but in the meantime it, too, would issue a tracking stock.

But confusion reigns about the breakup plan, the potential tax consequences for AT&T; investors, the size of AT&T;’s future dividends and what all four pieces might be worth.

In fact, AT&T; said the combined dividends of the four stocks probably “will be substantially less” than AT&T;’s current annual dividend of 88 cents a share, which with AT&T;’s low stock price amounts to a lofty 3.8% dividend yield.

“We would not be surprised ultimately to see AT&T; eliminate its dividend altogether” after the breakup, said analyst Anna-Maria Kovacs of the investment firm Janney Montgomery Scott.

Even so, the analysts who follow AT&T; daily are sharply divided about the breakup’s prospects. For instance, the analyst at CIBC World Markets raised his rating on AT&T; to a “buy” Wednesday, but Salomon Smith Barney’s analyst cut the stock to “neutral.”

In a stunning move, Kovacs issued a rare “sell” recommendation for AT&T--which; calls for dumping what was once one of corporate America’s blue-chip stocks.

Her call is “based on dismal results in [AT&T;’s] core long-distance operations in the third quarter, as well as on a reorganization plan that we believe will make it more difficult, rather than easier, for AT&T; to recover,” Kovacs wrote in her bulletin to clients.

Kovacs also fretted about AT&T;’s employees, saying that during the two years that the restructuring will occur, “morale, which is already low, can only plummet further.”

Others were more sanguine. Douglas Christopher, an analyst for Crowell, Weedon & Co. in Los Angeles, said he’s convinced the four stocks eventually will be worth more than AT&T; alone today. “The company’s [stock] price is extremely undervalued in my opinion, so it’s a special situation or value play for patient investors, though I do emphasize patient,” he said.

Jeffrey Pittsburg, president of the investment firm Pittsburg Institutional in Great Neck, N.Y., said he’s urging clients to buy AT&T; because it’s now so cheaply priced, and the breakup should ultimately create a higher value.

“The parts [of AT&T;] should be worth more than the whole, and if I’m an investor that’s what I would do,” he said.

But Christopher said there’s no question AT&T;’s various parts have different outlooks. “They’ve got two strong, growing businesses” in wireless and broadband “and two mature businesses” in long-distance and corporate services, he said. Of the four, Christopher said he likes the wireless unit most “because down the road it will become even more profitable.”

AT&T; Wireless’ tracking stock has fallen 24% since it debuted in April. But it still has an overall market value of $48 billion, representing more than half of AT&T;’s total stock market value of $88 billion.

That underscores how creating new stocks from the AT&T; family could unlock more value for AT&T; investors, Christopher maintained. (AT&T; Wireless’ stock on Wednesday rose 94 cents to close at $22.56 on the NYSE.)

“Believe it or not, I’m on the side that even the mature businesses still have significant potential,” he said, because even if their sales growth is slowing they remain solidly profitable. “Earnings matter and that’s what drives companies,” he said.

* AT&T; BREAKUP

The telecom giant says it will split itself into three separate companies. A1

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Telecom Titan’s Split

AT&T; plans to split into three companies and four stocks by 2002 in an effort to lift its sagging share price. Under the board-approved plan, the telecom giant will issue stocks for its long-distance and cable units in addition to the flagship and wireless stocks it has today.

* AT&T;: The company’s traditional residential long-distance business and the unit serving business customers will remain at the parent company under Chairman C. Michael Armstrong. Together they account for the bulk of AT&T;’s profit and revenue. The company will issue a new stock to track the fast-eroding long-distance business.

* AT&T; Wireless: The unit has lost 25% of its value since an initial public offering in April. But it is considered the future of telecommunications and is adding customers at a healthy rate. AT&T; plans to sell its remaining 85% stake by next summer.

* AT&T; Broadband: After spending more than $100 billion to enter the cable business over the last two years, the company will take the unit public next summer in an offering that some say will make it easier for a rival such as Comcast or Charter Communications to eventually pick it off.

Makeup of a Breakup

AT&T;’s announcement Wednesday that it will spin off some businesses and create four tracking stocks by 2002 raises numerous questions for investors and consumers. It also marks the third major overhaul for the telecommunications giant since 1984.

Consumer Positives

* With the cable and phone units more tightly focused, more attention could be paid to customer service and the creation of more innovative services.

Consumer Negatives

* New strategy could weaken AT&T;’s chances of becoming a strong overall competitor to local phone companies.

* Split could unsettle the giant company’s work force, causing customer service to deteriorate in each of the units.

* Broadband unit may need to raise revenue to continue funding its push into digital cable, Internet service and cable telephone service, meaning higher prices for residential cable service.

* Shrinking long-distance business could be left to languish against aggressive competition from local phone companies.

Investor Positives

* Ownership of four stocks that might be worth more than AT&T;’s battered stock.

* Four stocks could draw investors that have avoided AT&T;, driving up the new stocks’ prices.

Investor Negatives

* Extreme market confusion about what the four stocks might be worth in the future.

* Potential cut in or elimination of AT&T;’s dividend.

* Continuing decline in morale of AT&T; employees as restructuring proceeds.

Wall Street Hangs Up

AT&T; shares have plummeted from their 1990s peak of $66.66 in 1999, as much of Wall Street has given up on the company’s growth strategy. But measuring the value of companies AT&T; has spun off since its 1984 breakup, investors who’ve held on to the pieces have reaped hefty gains.

Market Values

In billions

AT&T;: $88

AT&T; spinoffs:

SBC Commun.*: 186

Verizon Commun.**: 136

Qwest***: 81

BellSouth: 80

Lucent Technologies: 67

AT&T; Wireless: 48

NCR: 4

AT&T; shares, monthly closes and latest