A Slimmer AT&T; Not Necessarily Exciting

AT&T; Corp.’s agreement on Wednesday to sell its cable business to Comcast Corp. helps shore up the phone company’s finances by unloading much of its massive debt.

But the deal doesn’t do much to help AT&T; shore up the unexciting prospects for its two remaining businesses, analysts say.

Under the deal, Comcast will take $20 billion of AT&T; debt--relieving what had been an albatross on the company’s prospects. The deal, coming after Ma Bell already has spun off its wireless unit, leaves AT&T; with a consumer long-distance business and a business services division.

AT&T; contends those two remaining businesses will live and thrive on their own. The company plans to proceed with its earlier plan to spin off the consumer long-distance unit into a so-called tracking stock, with the business services unit staying with AT&T; and its familiar “T” stock symbol.

But while the consumer long-distance business--long AT&T;’s bread-and-butter--remains extremely profitable, it is steadily shrinking. Long-distance rates continue their steep decline and competitors are taking larger and larger market shares. AT&T; still has 60 million long-distance customers, and it hopes to offset the declining revenue by selling those customers new services such as local phone service and high-speed Internet service.

The company’s business services unit, which sells advanced telephone and data systems to corporations, is also profitable, but has suffered from inattention and uncertainty as AT&T; spent heavily on its cable operations and struggled to extricate itself from Concert, its money-losing international telecommunications joint venture with British Telecom.

Analysts say a turnaround in both businesses is unlikely.

“The remaining parts of AT&T; are rapidly deteriorating businesses from another era,” said Scott Cleland, a telecommunications analyst with the Precursor Group, an independent research firm. “AT&T; proper, in the end, will probably end up [being acquired by] a company like BellSouth.”

Nonetheless, Cleland and others say the two businesses can operate on their own for a long time, since they both generate large amounts of cash.

“It’s like [the movie] ‘Dead Man Walking,”’ Cleland said. “Somebody can hang around on death row for 10 years, but that doesn’t mean they’re going to live.”

With neither business in a growth mode, Cleland and other pessimists see little attraction for investors outside of the much-lowered dividend that the consumer business will continue to pay shareholders.

However, there are some reasons to be optimistic, says Jeff Kagan, an independent analyst.

“The business side is strong and getting stronger because of the failing competitors ... the trend is that customers are flocking back to these guys,” Kagan said.

The outlook for the consumer unit could also brighten if AT&T; makes good use of the local network assets it bought from NorthPoint Communications, a onetime competitor to local phone companies. Done right, AT&T; can use those facilities to gain a toehold in the local phone market and solidify its base by selling customers more than just long-distance.

But that’s a tough road, too. In California, the nation’s largest telecommunications market, AT&T; has been largely locked out of the residential phone market as well as the business of selling high-speed Internet access over phone lines, a service known as digital subscriber line, or DSL.

What’s more, the so-called Baby Bell local phone companies, once part of AT&T;, are rapidly gaining entry into the long-distance business and stealing away millions of customers from AT&T; and its chief rivals, WorldCom and Sprint. All three of the long-distance giants have been struggling to counter the one-two punch of falling rates and assaults from the local phone companies.

Those factors prompt analysts to view AT&T;’s revival plans with skepticism. Instead, they believe AT&T; will ultimately sell those units to other phone companies. Earlier this year, there were rumors that the firm was talking to BellSouth, an Atlanta-based Baby Bell, about a possible combination.

Regulatory concerns remain a significant hurdle for any deal that would combine a Baby Bell with AT&T.; But that regulatory reluctance probably will disappear in a few years, as more companies enter each others’ competitive domains.

“It’s time to say goodbye to AT&T;, because that business is in an ever-descending orbit and its underlying technologies are not the way of the future,” said Ken McGee of the Gartner Group. “AT&T; was a patient that could not be saved.”