NEW YORK - Money managers are putting AT&T Corp. on hold.
Investors expressed disappointment with the telecommunications giant's strategy to break the company into four separate businesses, covering wireless, broadband, business and consumer services. And many believe time is running out for AT&T Chief Executive Officer C. Michael Armstrong.
"You really can't take a bad company, split it into four and say you have to own part of this now," said Bill Turner, equity analyst at Banc One Investment Advisors Corp., Columbus, Ohio. The market agreed, driving down AT&T's stock price by $5.07 a share, or one-sixth of its value, Oct. 25 and 26 after AT&T's twin announcements of its restructuring plan and disappointing earnings news.
The wireless company faces pricing pressure in the future, AT&T overpaid for its cable units, revenues in its traditional long-distance rates are declining, and management ignored its lucrative business services area, he said.
Larry O'Connell, vice president and senior analyst for American Express Financial Corp., Minneapolis, was more sanguine about prospects for AT&T's wireless and cable units, but he said AT&T pulled the plug too soon on its integrated strategy.
"The things they are accomplishing are more satisfactory for bankers than for investors. You've just put the whole company together, and now you're going to pull them apart. It's an investment banker's paradise," he said.
Even some supporters of the restructuring plan think investors will have to wait up to 18 months for it to create value for shareholders. Jean Schlatter, an analyst with Invista Capital Management, a unit of Des Moines, Iowa-based Principal Capital Management LLC, said AT&T's stock "probably is going to tread water" in the short term. Results won't be apparent for 12 to 18 months, she said, as the complex plan is implemented.
Reaction lukewarm
This all spells a lukewarm reaction at best for the about-face of Mr. Armstrong's 3-year-old strategy to integrate wireless, cable and long-distance phone service. While Mr. Armstrong has denied he was reversing course, money managers didn't buy that line. AT&T is "waving the white flag," said Brendan Connaughton, a vice president and senior portfolio manager at Wells Fargo & Co.'s private asset management unit in San Francisco.
Addressing one of the worst-kept corporate secrets in history, Mr. Armstrong announced Oct. 25 that AT&T would be broken into four business units that eventually would have three separate stocks for wireless, broadband and business service companies. A tracking stock will be created for the company's consumer long-distance company.
Initially, AT&T shareholders will be able to exchange at least $10 billion in stock for shares in AT&T Wireless; 15% of the unit currently is publicly owned through a tracking stock. Next summer, AT&T plans an initial public offering tracking AT&T Broadband, which later will be recapitalized as a common stock. The company's principal unit will be AT&T Business, incorporating the company's business and consumer units; a separate stock tracking the consumer unit's performance will be issued.
At the same time, AT&T unveiled lowered revenue expectations. While third-quarter earnings of 38 cents a share narrowly beat analysts' expectations, company officials explained that shrinkage in its mature long-distance business will drag down earnings in the fourth quarter and 2001. Overall, third-quarter revenues were up only 3.7% on a year-over-year basis.
On the positive side, the wireless unit chalked up 36.6% revenue growth, and the cable operation's revenue grew 10.8% in the quarter.
While revenues from Business Services' data and Internet protocol services grew more than 20% in the quarter, they were largely offset by declines in voice revenues (non-data transmissions), lowering the growth rate to 2.5% for the unit.
And consumer long-distance revenues - under severe pricing pressure and switching to wireless and Internet technologies - declined by nearly 11%, with bigger drops expected next year.
The upshot is that falling revenues from AT&T's traditional long-distance business no longer will support the capital expenditures needed for its high-growth areas, particularly the capital-intensive cable business. As separate companies, wireless and cable will be able to tap the capital markets directly.
Rick Franklin, senior telecom analyst for Banc of America Capital Management Inc., St. Louis, said the restructuring would create four smaller companies that will be more entrepreneurial, be easier for Wall Street to value and provide management with strong incentives to boost share price.
The other side of the coin, he noted, is that AT&T faces disruptions for the next 18 months as the divestiture strategy is put in place.
`Show-me stock'
Indeed, a cloud will hang over the company's stock for some time. "This will very much be a show-me stock," said Tom Hudson, partner, Lord Abbett & Co., Jersey City, N.J., whose mutual funds have sold off their AT&T holdings this year.
The question is which - if any - of the four stocks will be most attractive to investors. American Express' Mr. O'Connell said the wireless unit appears very attractive, and the revenues obtained by the cable unit are solid.
But Mr. Connaughton said his fear is that AT&T will load down the wireless company with debt. Market rumors, he said, suggest that half or two-thirds of AT&T's $62 billion in debt could be placed on the wireless unit. And Banc One's Mr. Turner said the wireless sector - so far immune to price competition - could see pricing pressure going forward.
Mr. Connaughton added that the cable unit "is going to be attractive once they get the capital expenditures out of the way. But it's such a black hole, you don't know."
And Mr. O'Connell worried that the Federal Communications Commission will demand concessions as AT&T turns to the regulator for approval to unbundle the companies.
Now, it remains to be seen whether Mr. Armstrong will be able to execute his new plan - something he had not been able to do with his previous bundling strategy.
"Time is not on his side, and yet he's got to prove that he can execute," Mr. O'Connell said.
