| BUSINESSWEEK ONLINE : DECEMBER 13, 1999 ISSUE | ||||||||
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| NEWS: ANALYSIS & COMMENTARY
Is AT&T Ready for Liftoff? Wall Street is warming up to its wireless and cable strategy When AT&T CEO C. Michael Armstrong strides onto a stage at the Waldorf Astoria hotel on Dec. 6 to preside over his annual confab with Wall Street analysts, he'll need more than his usual charm. AT&T (T) shares briefly showed signs of life in late November--after posting single-digit gains for most of this year, while the S&P telecom index rose 21%. First, investors caught wind of plans for a tracking stock for the phone giant's hot wireless businesses. Then Jack Grubman, the ultra-influential Salomon Smith Barney analyst, went from negative to bullish--dragging other skeptics along. In five days, AT&T shares jumped 30%, to 60. But by Dec. 1 they had fallen back to 55 11/16, leaving AT&T shareholders with an 11.7% gain for the year. PREMATURE? Back in the telecom markets where AT&T competes, it's hard to tell why Wall Street got its hopes up in the first place. AT&T is struggling with disappearing long-distance profits and glitches in getting its cable systems to carry local phone and Net traffic. There, the rally seems premature at best. ''I don't get the rally,'' says industry analyst Brian Adamik of The Yankee Group. ''The business issues haven't changed.'' Indeed, AT&T still must upgrade cable networks it acquired with the purchase of Tele-Communications Inc., complete the purchase and upgrade of cable operator MediaOne Group Inc. (UMG), and fend off a legal challenge from Internet rivals who want access to those networks. Meanwhile, there's no sign of letup in the price wars that have slashed margins in the core long-distance business, where AT&T still gets 67% of its revenues. With the new year will come more pressure; by then Bell Atlantic (BEL) may become the first Baby Bells allowed into the long-distance market--and others are ready to follow. The $67 billion phone giant, meanwhile, is still trying to catch up with MCI WorldCom (WCOM) and other rivals in international telecom markets. But AT&T's wireless business is booming along with the rest of its industry. So the prospect of a hot wireless issue has been an elixir. Revenue at AT&T Wireless is growing at 40% a year, vs 6.1% for all of AT&T this year. And tracking stocks, aimed at ''unlocking'' the hidden value of young, fast-growing businesses within established corporations, are becoming de rigueur in wireless. BellSouth (BLS) has asked an investment bank to help prepare a tracking stock for its wireless unit, people familiar with the matter say. The company plans to use the stock as a currency to buy more wireless companies, such as VoiceStream Wireless Corp. (VSTR) Tracking stocks are also under discussion at SBC Communications (SBC), as well as Bell Atlantic and its merger partner GTE (GTE). They would combine their wireless operations with Vodafone AirTouch's (VOD) U.S. operations. All these trackers would like to duplicate the performance of Sprint PCS (PCS). That tracking stock has tripled in value to $38 billion since February. That bodes well for AT&T. If its wireless unit, which is expected to have sales of $10.4 billion next year, gets a similar valuation, the tracking stock could hit the market with a value of $45 to $50 billion. But what are the implications for AT&T's business? AT&T's new wireless unit will include two components, mobile phone service and another technology called fixed wireless, which provides a ''final mile'' connection for local, long-distance, and, eventually, data service. And the unit's separate tracking stock will give Armstrong a more valuable currency than AT&T's shares for more deals. Another bonus: The tracker can help AT&T recruit and retain talent in the fast-growing wireless business. President John D. Zeglis, a key lieutenant, will head the new unit and will be in line for a windfall when the new stock is issued. The unit's current chief, Dan Hesse, may be ticked off--briefly: He could be in line to get a chunk of stock exceeding $20 million in value, sources say. TWO HEADS. But a tracking stock creates management challenges, too. The unit may be fiscally autonomous, but it will be physically tied. Armstrong wants to retain control over wireless so he can coordinate marketing, product development, and pricing with other parts of AT&T--so the giant can bundle all sorts of communications services for consumers and business customers. So the tracking unit won't have its own board, those familiar with the planning say. The wireless unit, to be overseen by AT&T's board, must coordinate with the cable unit, both of which will provide local phone service. And when directors choose which projects to fund, they'll have two sets of shareholders to answer to, creating potential conflicts (box). What happens to AT&T itself? The bulls say it's poised to take off--because its new cable assets are about to pay off. ''We had been skeptical, but we now believe AT&T will show significant growth driven by cable TV, cable telephony, and cable Internet access,'' says Lehman Brothers analyst Blake Bath. Grubman, who has advised MCI WorldCom on merger deals, put a buy on AT&T for the first time in four years on Nov. 29, specifically citing AT&T's cable strategy.That's good news for investors and consumers, who could soon be seeing new competition in local calling over the AT&T cable system. But AT&T must still prove that its cable network can handle the enormous volume that millions of users will generate. It will take several years for AT&T to establish a clear record of success. Until then, its rallies are likely to be short-lived. By Steve Rosenbush in New York _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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