AT&T splits into four parts

All of AT&T Corp. will be divided into four parts. The company unveiled last month its plans to keep each of the four publicly traded business units under the AT&T brand name in a bid to raise the company’s flagging value. The company also reported third-quarter revenues.

Under the much-anticipated plan, AT&T Wireless, AT&T Broadband and AT&T Business will be traded as common stocks, while AT&T Consumer will be traded as a tracking stock of the business unit. The broadband unit will include the company’s cable television properties and its Excite@Home Inc. Internet access service. The new companies will trade publicly by 2002, executives said. AT&T shareholders will receive shares in each of the companies.

AT&T executives outlined their plans for the break up of the company in a conference call with analysts. In December or January, AT&T will offer its shareholders US$10 billion in wireless stock in exchange for their AT&T shares. Executives also said that AT&T would pay lower dividends now and varying dividends in the companies later on, to reflect different levels of reinvestment in wireless and broadband units.

Executives hope that the break up will reverse a sharp downturn in AT&T stock by revealing to investors value they wouldn’t otherwise see from fast-growing businesses like wireless and broadband. Although long-distance still accounts for more than a quarter of AT&T’s business, growth in the consumer area has slowed, and profits have fallen as more and more companies have entered the market and lowered prices. Until now, the company has poured revenues from long-distance into faster-growing divisions, further weakening the group.

AT&T shopped its long-distance unit around more than a year ago, according to a source close to the company. At that time, the bankers involved valued the company at a measly two to four times revenue, which is one reason management shelved the plan then. At that type of valuation, there would have been little incentive for investors to hold the stock.

But a spinoff could actually be the only way to turn the phone business into a growth business, instead of a dying one. At present, AT&T is in a crunch because there is simply no way to squeeze more efficiency out of the AT&T network. But after the phone business is spun off, it will be able to take bids from other networking companies, perhaps finding more efficient networking partners.

AT&T lost 12.5 per cent of its value by midday Oct. 25, falling from US$26.88 at the end of trading on the previous day to US$23.50 by 12:33 p.m. EDT.

“The purpose of these new companies is to renew and sustain our long-term growth,” CEO C. Michael Armstrong said during last month’s phone call. “By unleashing them into four groups, we believe we will create a currency for these units that will enable them to participate in the consolidation of this industry.”

Armstrong said making companies out of the separate units will allow them to respond to conditions in their respective markets more quickly and access capital markets more easily. The wireless group, he argued, will be able to raise more capital as a separate company than it could under AT&T’s umbrella. Management will be able to give more attention to business services and broadband as a result of the split, he said.

Armstrong has bet on cable as a strategy, at least in part to find a cheaper way to deliver the same services the company already offers. According to AT&T, the network costs of a phone call are only 15 per cent of the call’s cost. Access charges – the fees long-distance carriers pay regional phone companies – are 35 per cent. By owning the cable all the way into your home, AT&T can avoid paying that 35 per cent and can offer a whole slew of data, video and Internet services to consumers.

This maneuver, which is intended to get full value for the company’s assets, may only expose those assets for what they are – underperforming. AT&T has vigorously denied that it overpaid for its cable assets, but analysts scoff at the notion that the spun-off broadband unit will be worth more on the open market than the US$112 billion that Armstrong shelled out for it.

The reason is that so far, the cost of making this strategy work has been greater than many investors had hoped. The company has upgraded 850,000 customers to digital services. But signing up another 400,000 to 500,000 cable phone customers this year, as AT&T has promised, will be rough sledding.

In the wireless department, AT&T is simply a victim of bad timing. The whole sector had been flying high for more than a year, full of seemingly limitless possibility. Until September, that is, when the sector took a dive. The AT&T Wireless IPO was good from the opening bell, opening at US$29 and raising US$10 billion for the company. But it was not a stellar mover and has only fallen, languishing in the US$20s ever since.

The reorganization completely overshadowed AT&T’s release of third-quarter earnings. The company beat analysts’ profit expectations but fell below earnings expectations. In May, the company lowered its targets for the rest of the year. In the third quarter, the company earned US$1.3 billion on revenue of US$17 billion. The company’s wireless revenue grew more than 35 per cent on the addition of 750,000 new subscribers.

Under the new plan, AT&T will move first to convert its wireless tracking stock into a common stock. In 2001, the company will transfer the balance of its interest in the wireless group to AT&T shareholders. The wireless group that is currently represented by a tracking stock will become an independent, publicly held company by the summer of 2001, the company said.

Next, AT&T will move to create AT&T Consumer, a tracking stock that represents the company’s residential long-distance and WorldNet Internet access business. The company plans to distribute all of the tracking stock to AT&T shareholders in the third quarter of 2001.

The consumer unit will invest in “growth opportunities,” like DSL broadband communications and Internet services, the company said in Wednesday’s release.

Also in the summer of 2001, the company plans to hold an initial public offering of an AT&T Broadband tracking stock – one that will be converted to a common stock within a year. The company will include Excite’s high-speed Internet access business. Broadband services include multichannel video, pay TV and communications.

Once the four companies are up and running, AT&T’s principal unit will be AT&T Business, the unit that provides communications and networking services to companies. AT&T Business will trade on the New York Stock Exchange under the company’s existing “T” symbol and be the parent company of AT&T Consumer and its tracking stock.

Under the plan, Armstrong will remain AT&T’s chairman and CEO. Wireless Chairman and CEO John Zeglis and President and COO Mohan Gyani will retain their posts. AT&T’s board of directors will name CEOs for the new AT&T Consumer, AT&T Broadband and AT&T Business companies. All four companies will have a license to use the AT&T brand and will continue to work together as separate companies.

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