Cable Deal Seen as Boon for AT
With the AT&T; Broadband sweepstakes apparently over, several analysts and large AT&T; Corp. shareholders say the telecom giant has hit the jackpot.
“We think Comcast Corp. overpaid, and you can see that reflected quite clearly in [Thursday’s] trading,” said Michael Hodel, equity analyst at Morningstar Inc., noting that AT&T; rose $1.05 to $17.85 on the New York Stock Exchange while Comcast special-class shares fell $2.28 to $35.79 on Nasdaq.
The rally in AT&T; shares Thursday gave more investors hope that the beaten-down stock is primed for a sustained rebound.
The cable deal spruces up AT&T;’s balance sheet by unloading about $20 billion in debt. That will cut the firm’s total debt in half, giving AT&T; room to make acquisitions or other deals, analysts said.
“In one fell swoop, AT&T; solves its debt problem, which gives it financial flexibility to do things that can spur growth in its core long-distance business,” wrote Salomon Smith Barney analyst Jack Grubman, who raised his rating on AT&T; to “buy” from “neutral” and lifted his target price for the stock to $25 from $22.
AT&T; also won “a major victory” by getting majority control of the newly enlarged Comcast, Morningstar’s Hodel said. AT&T; shareholders will own two-thirds of the voting interest in the new AT&T; Comcast.
Hodel called Comcast the best match among the three rival suitors for the broadband assets, saying it has a stronger balance sheet than Cox Communications Inc. and that a deal with AOL Time Warner Inc. would have faced more regulatory scrutiny.
To be sure, AT&T; faces many skeptics. Standard & Poor’s Corp. cut its rating on the firm’s long-term debt to BBB-plus from A-minus on Thursday, citing worries about the long-distance business.
Even so, some mutual fund managers with stakes in AT&T; reacted with near glee to the deal.
The AT&T; board did an amazingly good job of handling this process,” said Bill Nygren, a portfolio manager at Chicago-based Oakmark Funds who controls about 15 million AT&T; shares. “By going through all the steps they basically got $2 a share better than the original [Comcast] offer made in July.”
AT&T; stock, he said, “is a better buy today than at any time this year.”
The combined per-share value of AT&T;’s parts, including the stake in broadband assets, is in the mid-to high $20s, Nygren estimates. “And if you’re dreaming about what AT&T;’s brand name is worth in a competitive process, the whole thing might be north of $30.”
He called the deal a “strong vindication” not only of the AT&T; board’s patience, but also of AT&T; Chief Executive Michael Armstrong’s controversial cable strategy. “Armstrong has taken a lot of flak, but the Comcast-AT&T; combination is going to be a broadband powerhouse,” Nygren said.
Shelly J. Meyers, Beverly Hills-based manager of the Citizens Value mutual fund, which owns AT&T; shares, concurred. “Armstrong’s strategy turned out to be a great deal for AT&T; shareholders, even though he may have overpaid for assets in executing that strategy,” she said.
With an implied value of $5 to $6 a share for AT&T;’s non-broadband assets, Meyers believes the stock market is undervaluing AT&T;’s core business by roughly half. “This deal will inspire people to take a fresh look at AT&T; as an entire company,” she said.
AT&T; has numerous options in terms of future spinoffs, mergers or other deals, Meyers said.
Though some analysts believe Comcast overpaid, many said that Comcast’s managers, the Roberts family, should ensure healthy profit margins at the new business. “Comcast has done a fantastic job integrating past acquisitions and they run a tight ship, with [operating] margins near the top of the cable industry,” Hodel said.
“I’m happy we’re hooked up with a company like Comcast ,” Meyers said. “And as an AT&T; shareholder, I’m happy to get all that debt off the balance sheet.”
Nygren of Oakmark Funds called it “a good deal for Comcast too.” Neither he nor Meyers owns Comcast stock in their funds.
“This is a historic time,” Meyers said. “We’re in the very early innings when it comes to cable broadband usage in the basic home. This technological revolution is going to change the sending and receiving of voice, data, video--everything.”
