Should AT&T Shareholders Stick or Swap?


By David Shook For AT&T (T), breaking up really is hard to do. Look at the company's current split, its third since 1984. This time AT&T is dividing into four parts. The first step is a special, limited-time offer to exchange Ma Bell's common stock for shares of AT&T Wireless (AWE), one of six major mobile-phone-service providers nationwide. The company is trying to generate interest and liquidity in Wireless' tracking stock, which hasn't lived up to the lofty expectations that accompanied its initial public offering a year ago.

Here's the caveat: Investors who take AT&T's offer give up their rights to stock in the three other AT&T divisions that will exist once the company divides. Ma Bell shareholders, still 5 million strong, are wondering what to do. Some have jumped at the offer, but savvy investors may want to sit tight. As the largest cable operator and long-distance provider in the nation, the wayward telecom giant may just be in a temporary rut. If you jump ship now, you'll not only give up your rights to the rest of the company but you also lose a chance to see if AT&T can finally make its vast cable holdings the new profitable backbone of the company.

That's not a knock on AT&T Wireless. It seems to have as good a chance as any company in this still-competitive market. The wireless company is the country's third-largest, behind Verizon and Cingular. And while AT&T Wireless isn't yet profitable, revenue in the first quarter increased 46%, to $3.2 billion. It has 15 million customers and a network that covers almost the entire nation. But it's too early to tell how successful the wireless industry will be in the next few years.

LOST DIVERSITY. Clearly, there's potential for growth. Michael Ingraham of U.S. Global Investors says his company's funds have gradually sold off much of their stake in AT&T. He converted the remaining small investment from Ma Bell shares to Wireless. "We think Wireless is more the future than fixed lines -- and it's my belief that Wireless will give what remains of AT&T the most growth," he says.

But jump on the Wireless offer now and you lose the chance to diversify in the telecom industry. The full breakup later this year means shareholders will receive stock in four companies instead of one: Wireless, Cable Broadband, Consumer, and Business Services. Each will have its own management and stock. That's diversification -- a worthy goal in an industry that's undergoing rapid change.

You can see why the Wireless tracking offer is so tempting to beleaguered AT&T shareholders, at least in the short-term. They've seen a steep decline in the stock price -- a 63% fall since the market peaked in March, 2000. Investors have dumped the stock because Chief Executive Officer Michael Armstrong made a huge bet on cable broadband three years ago that hasn't paid off: After buying John Malone's Tele-Communications Inc. for $48 billion in 1998, AT&T acquired MediaOne for $58 billion last year.

SWIFT DECLINE. Nearly all the analysts who cover the company see tremendous value in AT&T's cable lines. And growth in broadband Internet access, while slow, will pick up, they say. The company had hoped that by now cable broadband and local phone service over cable lines would offset a swift decline in traditional long-distance sales. But with so much competition in long distance following the Telecommunications Act of 1996 -- which allowed Baby Bells to sell long-distance service -- AT&T has lost both market share and pricing power.

On Apr. 24, AT&T reported a loss of 10 cents per share in the first quarter, compared to a gain of 54 cents in the year-earlier period. The company had revenues of $16.76 billion, a lackluster 5.4% increase over the year-ago quarter. Sales increased due to strong results from wireless, broadband and business data, and Internet services, but were offset by sharp declines in consumer and business long-distance.

Still, AT&T is hoping its breakup will free some of the value hidden in its parts. Not all investors are convinced. "If I were presented this prospectus, I'd just be fed up," says Tom Taulli, author of Investing in IPOs. "Long-time AT&T shareholders have been overwhelmed by a whole stack of restructurings and spin-offs, split-offs, and split-ends over the years," he says. Taulli insists he wouldn't buy the Wireless stock, either.

CLIMBING CASH FLOW. AT&T claims that the restructurings have been a necessary response to a rapidly changing competitive landscape. It's a reasonable rationale. And it's not hard to find investors who are still convinced AT&T's breakup will be a winner. "We haven't made our decision yet, but we'll probably...stick with AT&T," says Scott Schermerhorn, Boston-based manager of the Liberty Growth & Income Fund and Liberty Utilities Fund. "We still like the long-term prospects for AT&T. We like the company's ability to generate cash."

Indeed, AT&T's cash flow continues to climb steadily. It increased to $13 billion in the first quarter from $11 billion a year ago. The company also reduced its net debt position 15.5%, to $47 billion from $56 billion last December, improving its balance sheet and increasing its cash flow considerably.

Yet both stocks have taken a hit in the telecom rout this year. AT&T trades at $21.38 a share, down from $60 in March, 2000. AT&T Wireless sells for $18.76 a share, a decline from $35 at the IPO in May, 2000. At the current exchange offer on the table, investors would get $22.06 in Wireless stock for each share of Ma Bell, a 3.2% premium. But it's less than half the premium that was available when the offer began on Apr. 19 because AT&T shares have fallen slightly since then while Wireless' stock price has risen.

The offer ends May 25. It's a deal smart investors might want to refuse, waiting instead for the company to split into four enterprises in the fall. Then you can get the Wireless stock along with the rest of the company, which could be headed back to profitability. Shook covers the markets for BW Online in our daily Street Wise column


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