AT&T plans to create four new companies

AT&T announced today plans to create four new companies, each operating under the “AT&T” brand, to bundle each other’s services through inter-company agreements.

Under the company’s restructuring plan, which it expects to complete in 2002, each of its major units will become a publicly held company, trading as a common stock or a tracking stock. AT&T shareowners ultimately would own stock in four businesses.

Upon completion of the company’s plan, AT&T Wireless and AT&T Broadband will be represented by independent, asset-based common stocks. AT&T Consumer will be represented by a tracking stock of AT&T. AT&T’s principal unit will be AT&T Business.

“This is a pivotal event in the transformation of AT&T we began three years ago,” AT&T chairman and CEO C. Michael Armstrong said in a press release early this morning. “It creates a family of four national service providers that will be even better equipped to bring American families and businesses a new generation of broadband communications and information services.

Armstrong stressed that the new companies will continue to collaborate. AT&T Business, for example, will continue to bundle the Wireless company’s services into its offers for business customers. AT&T Business will continue to use AT&T Broadband’s cable systems in serving some customers. The Wireless, Broadband and Consumer companies will purchase network services from AT&T Business under competitive, long-term commercial contracts.

AT&T, which currently has about 160,000 employees, said that it does not expect significant downsizing to result from its plans although it reiterated that each company would continue to size its operations to be as competitive as possible. Any employees whose jobs are eliminated will have access to job opportunities across all of the new AT&T companies, as well as a full range of assistance including job counseling.

AT&T recognizes the importance of its relationship with debt investors. The proceeds from the repayment of inter-company obligations due to AT&T by AT&T Wireless, as well as funds from the AT&T Broadband tracking stock initial public offering, will be used to retire short-term debt. The company will reapportion its remaining debt, in a manner to be determined, between AT&T Business (including the AT&T Consumer tracking stock) and AT&T Broadband. The company currently expects that existing TCI and MediaOne debt will remain with AT&T Broadband; AT&T’s term debt, with AT&T Business. Meanwhile, AT&T intends to increase its credit facility by approximately $15 billion. AT&T will work with the credit rating agencies to obtain strong ratings for the new companies.

AT&T’s Board of Directors unanimously approved the plan in a series of meetings through the first half of the week. Next, the board will establish a capital structure and dividend policy appropriate to each of the new companies. Among the factors the board will consider are each company’s financial performance, the dividend policies and capital structures of comparable companies, and each company’s on-going capital needs. AT&T Consumer, for example, is expected to allocate a greater portion of its earnings to dividends, while the other businesses can create greater shareowner value by reinvesting more of their profits.

The board plans to complete its review of dividend policies before the end of the year. However, the company expects that the four new companies’ combined dividend will be substantially less than AT&T’s current dividend. Anticipating that framework, the board intends to adopt a corresponding dividend policy for AT&T beginning in the fourth quarter of 2000.

In the first phase of its restructuring plan, the company intends to offer AT&T shareowners the opportunity to exchange their AT&T common stock for AT&T Wireless tracking stock at approximate market prices. About fifteen percent of the economic interest in AWE (AT&T Wireless) is already in public hands. The company said it plans to offer AT&T shareowners the opportunity to exchange at least US$10 billion of its economic interest in AWE for their AT&T shares, subject to market and other conditions.

The company also said that it would seek any necessary tax, regulatory and other approvals to convert the AWE tracking stock into an asset-based AT&T Wireless common stock and to distribute it to shareowners. As a separate company, AT&T Wireless will be better able to raise capital on its own, attract and retain employees and use its stock as a currency in acquiring, partnering or engaging in other transactions with other companies. AT&T expects AT&T Wireless to be an independent, publicly held company in the summer of 2001.

Further, AT&T plans to create a new consumer communications and marketing company around its existing residential long distance and WorldNet Internet access businesses. AT&T said it would create a new class of stock to track the Consumer company’s performance. It currently plans to distribute 100 per cent of the tracking stock to AT&T shareowners in the third quarter of 2001.

As a separate company, AT&T Consumer plans to explore new growth opportunities. For example, it could use a portion of its cash flow to invest in technologies, such as Digital Subscriber Loops (DSL), to provide “any distance” broadband communications and Internet services.

AT&T also announced that, depending on market conditions, it plans to conduct an initial public offering (IPO) for stock that will track the performance of its Broadband unit during the summer of 2001. AT&T Broadband provides broadband services, such as multi-channel video, pay-TV, high-speed Internet access, and communications. It will assume AT&T’s ownership interest in Excite@Home in connection with its public offering.

The company plans to recapitalize the Broadband tracking stock to an asset-based common stock within 12 months of the IPO. It will then simultaneously separate the rest of the company from its Broadband unit, creating two independent, publicly traded companies.

When all four companies have been established, AT&T’s principal unit will be AT&T Business, which provides enterprise communications and networking. It will also be the legal owner of the AT&T brand, which it will license to the other companies. It will be the parent company of the AT&T Consumer business and will be the issuer of the AT&T Consumer tracking stock. AT&T will include the AT&T Network and AT&T Labs, which will serve other AT&T-branded companies as well as other companies under commercial contracts. AT&T will also continue to hold a 50 per cent interest in Concert, its international communications services joint venture with BT.

All four companies will generally have exclusive licenses to use the “AT&T” brand within their respective markets and, under the terms of the license, they will commit to pre-determined service quality standards and conform to common customer relationship policies on such issues as privacy.

Armstrong said the company’s plan will not only give greater visibility to the market value of each of AT&T’s individual businesses but will free them to be more responsive to their specific markets and move more quickly to seize growth opportunities. Establishing AT&T Wireless as an asset-based stock company, for example, will enable it to raise more capital than it could as part of AT&T and give it greater strategic flexibility.

The consumer services company, to be known as AT&T Consumer is a provider of pre-paid calling cards with distribution through more than 60,000 retail outlets. AT&T Consumer entered the local service market in Texas and New York and already has 950,000 “any distance” customers. Its WorldNet service has 1.3 million subscribers with residential dial-up Internet access.

As a tracking stock, AT&T Consumer will be able to use its cash flow in growing these businesses and investing in new initiatives. The new company will have an exclusive license to use the “AT&T” brand for standalone residential long distance and dial-up Internet access service.

Armstrong said that the restructuring plan would allow AT&T management to give increased operational focus to its Business and Broadband units. AT&T Business’ data and IP revenue grew more than 20 per cent in the third quarter, but voice long distance revenue continued to decline industry-wide at a faster rate than previously estimated. Overall, AT&T Business generated more than $28 billion in revenue over the last 12 months. AT&T Broadband produced revenue of $9.3 billion in the same period. It continues to meet aggressive targets for installing new cable services, with a revenue increase of nearly 11 per cent in the third quarter, and is expected to hit its full stride in 2001.

The company hopes to complete all transactions in 2002, following any requisite shareowner votes in 2001 and necessary regulatory reviews and tax rulings.

Armstrong will continue as AT&T’s chairman and CEO. He said that the company’s Board of Directors would name CEO’s for the new AT&T Consumer, AT&T Broadband and AT&T Business companies at the appropriate time.

AT&T will file its exchange proposal with the Securities and Exchange Commission in the fourth quarter of 2000 and expects to implement the plan as soon as possible afterwards. Following the exchange offer and any additional sale, adjustment or other disposition, the company plans to distribute its remaining interest in AT&T Wireless to AT&T shareowners later in 2001. Both the distribution and the exchange offer are expected to be tax-free to U.S. shareowners.