The Case for AT&T as a Value Play


By Gene Marcial Some high-profile bears on Wall Street got roughed up pretty badly in 1999, but 2000 was their year. Those who had stuck to their bearish guns are now getting some vindication. But what's significant is that after last year's market mauling, some of these intransigent bears are now looking at value plays worth pursuing -- mainly in so-called Old Economy companies.

One such longstanding bear is Michael Metz, managing director and portfolio manager at CIBC World Markets. He's sticking to his belief that the market is a "very high-risk area." He thinks the public is "satiated with stocks" and that corporate earnings estimates are still too high. With the economy dragging, Metz thinks "this market will be a go-slow market" but with enormous bargains to be had.

One value play that he thinks is still very much a part of the Old Economy is AT&T (T), the largest U.S. long-distance and third-largest cellular telephone company. He feels AT&T's total value is simply out whack with the pittance that its stock currently commands, 18 1/4 a share. Metz thinks AT&T is selling at a "ridiculous fire-sale price."

"BREAKUP STORY." He isn't alone in saying AT&T deserves a much higher appraisal. Merrill Lynch analyst Adam Quinton, who rates the company a long-term accumulate, says AT&T is a "breakup story," whose sum-of-the-parts value is about $117 billion, or 30 a share.

Investors turned away from AT&T when it recently cut its dividend for the first time ever to save some $2.8 billion annually. Quinton expects that AT&T will sell assets in the coming 12 months, realizing proceeds of about $22 billion. He says with AT&T's credit facility of $25 billion, the company will begin paying down about $32 billion in debt that's maturing within a year.

Here's the deal on why the Merrill Lynch analyst thinks AT&T is way underpriced: He estimates the value of its core business -- the consumer- and business-services units -- at 16 a share. (Consumer services is valued at $3.35 a share, and business services at nearly 13.)

VARIED INTERESTS. Then there are the wireless and broadband units that are scheduled to be separated from AT&T's core business over the next 12 to 18 months. AT&T currently holds 1.81 billion shares of AT&T Wireless -- net of the 178 million shares that will be sold to Japan's NTT DoCoMo. Based on the wireless unit's current price of 17 3/4 a share, Quinton values the parent company's stake in AT&T Wireless at $32 billion, or 8 1/4 a share, and he puts the broadband division's value at $44.3 billion, or 11 3/4 a share.

AT&T's other assets and interests are varied, including a 25% stake in Time Warner Entertainment, which Merrill Lynch analyst Jessica Reif Cohen values at $10 billion to $12.5 billion. Quinton takes the average of those two figures and gives AT&T's interest in Time Warner Entertainment a value of $11.3 billion, or $2.89 a share.

The total sum of AT&T's other assets and interests, says Quinton, amounts to $38.4 billion, or 9 5/8 a share. So adjusted for debt and liabilities, Quinton comes up with a total enterprise value for AT&T of $117.3 billion, or 30 a share.

TAKEOVER TARGET? What could upset such a valuation? Quinton himself concedes that AT&T faces a number of "challenging execution issues" and that any failure on the part of management could upset realizing the company's full breakup value. Given the stock's depressed price, some analysts say AT&T is vulnerable to a takeover. CIBC's Metz thinks that isn't an implausible idea.

"There are real opportunities, and we are just at the beginning of a whole new wave of mergers and acquisitions because of the abundance of ignored 'real values' in Corporate America." As a result, he says, leveraged buyouts, or LBOs, are making a comeback. "More companies will be taken private by managment-led groups because of such unrecognized values and assets," says Metz. These real values, he says, cannot long be ignored by the market. Marcial is Business Week's Inside Wall Street columnist


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