AT&T; to Seek OK for Reverse Split
AT&T; Corp. surprised Wall Street on Wednesday by announcing a step more typical of tiny companies with poor prospects: a reverse stock split.
The long-distance giant said it will ask shareholders to approve a 1-for-5 reverse stock split once management sells the company’s cable business. The effect should be to boost the market price of the stock, though the change won’t affect shareholders’ wealth.
AT&T;, whose shares have been battered since early 2000 along with most other telecom issues, appears to fear that the pending sale of its cable assets to Comcast Corp. could leave AT&T; stock trading below $5, hurting the company’s image, analysts said.
“They’re doing it because when you back out the Comcast offer for AT&T; Broadband, the stock would be in the single digits, which is not what the largest ‘telco’ in the U.S. would like people to see,” said Vik Grover, managing director for equity research at brokerage Kaufman Bros. “It’s cosmetics.”
The news wasn’t warmly received on Wall Street: AT&T; shares fell 59 cents to $14.42 on the New York Stock Exchange despite a rally in the broader market Wednesday.
Conventional stock splits, such as when a company exchanges two shares for every one outstanding, are considered bullish. Companies often use such splits to lower the market price of their shares after the stock has surged, to make the shares appear more accessible to the average investor.
If a stock is trading for $100, and it splits 2-for-1, the market price of a single share immediately falls to $50. Shareholders have the same dollar amount of stock, just twice as many shares at half the previous price.
A reverse split, as the term implies, reverses the process. In AT&T;’s case, every five shares would be exchanged for a single share. If the stock is around $15 at the time of the split, the “new” shares would trade for about $75 each immediately after the split.
Reverse splits are rare for major companies, analysts said. They typically are used by tiny companies with checkered histories. Often the goal is to prevent being booted, or “delisted,” from Nasdaq or the New York Stock Exchange by lifting the share price from the single-digit range. Stocks that trade below $1 for an extended period face possible delisting.
“Ordinarily there’s a real stigma to reverse splits,” said Scott Rader, head of Active-Investor.com, a Dayton, Ohio, firm that tracks splits. “It’s the domain of ‘penny’ stocks, those that trade below $1.”
In AT&T;’s case, however, analysts say the company is more worried about appealing to institutional investors, whose guidelines often preclude them from buying or holding any stock under $5, than about potential delisting.
Once the company completes the sale of its cable business, the remainder of AT&T; would be valued in the $4-to-$5-a-share range, analysts say, based on recent trading. And given the still-worsening telecom market, several analysts said that without intervention AT&T;’s stock easily could have sunk below the $5 mark after the cable sale.
“This saves them some embarrassment,” said Patrick Comack, telecom analyst at Guzman & Co.
AT&T; spokeswoman Eileen Connolly said the company’s aim is simply “to adjust the price on its common stock following the AT&T; restructuring transactions.”
The company unveiled the reverse-split plan Wednesday in a federal filing outlining issues for the company’s shareholder meeting this summer. At that meeting, shareholders also will vote on the planned sale of AT&T;’s cable business to Comcast and on a plan to create a so-called tracking stock for AT&T;’s consumer long-distance unit.
Once the cable business is sold, AT&T; will be left with two units: AT&T; Business, which sells data and voice services to corporations, and AT&T; Consumer, which includes the bulk of AT&T;’s long-distance business, plus the company’s consumer Internet service.
Both businesses are suffering amid stepped-up competition and falling long-distance prices. AT&T;’s residential long-distance unit, which will fund the company’s ongoing dividends, is especially vulnerable because its high profit margins are shrinking along with revenue, analysts say.
Connolly said Wednesday that dividend payments are at the discretion of AT&T;’s board, but she said the company’s pattern after previous spinoffs has been to increase the per-share dividend to match the effects of the change. If that holds true after the reverse split, the dividend, now at a 15-cents-a-share annual rate, would rise to 75 cents.
Reverse splits don’t change a business’ fundamentals, analysts say, and more than a few stocks immediately boosted by such splits have quickly fallen back toward single-digit territory. Costa Mesa-based Irvine Sensors Corp., for example, has slumped 30% since a 1-for-20 split in September.
Some experts said many other telecom and tech stocks seem to be better candidates for reverse splits than AT&T--for; example, Nortel Networks Corp., now trading at $3.50, Lucent Technologies Inc. at $4.03 and WorldCom Group at $4.77.
Will the practice spread in the tech and telecom world?
“I’m surprised some of the others haven’t gone the same route,” Rader said. “The Lucents and the Nortels of the world would seem like candidates, simply because of the $5 [institutional] guideline. If business doesn’t pick up in the telecom equipment sector, I wouldn’t be surprised to see other companies do a reverse split, especially if AT&T;’s move is well-received by investors.”
Some major AT&T; shareholders say they aren’t concerned about the planned split, calling the stock a bargain.
“The attractiveness of AT&T;, unfortunately, keeps growing,” quipped Chicago-based mutual fund manager Bill Nygren, who said he has added to his AT&T; holdings in recent months in the Oakmark and Oakmark Select funds. The stock is down 20.5% year to date.
Nygren said he believes the traditional phone business is being grossly undervalued at around $4 a share.
“It may not be a great business, but it’s worth two to three times what it’s being valued at,” he said.
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Reverse-Split Candidates?
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