NEW YORK (CNNfn) - After 123 years of trying to hold her family together under one roof, Ma Bell unveiled plans Wednesday to divide her massive holdings into four publicly-traded companies, hoping her burgeoning offspring can reconnect with the same investors who have largely soured on the $17 billion titan.|
The long-awaited AT&T Corp. restructuring essentially will give its current shareholders the ability to invest in each of the four new units -- AT&T Wireless, AT&T Broadband, AT&T Consumer and AT&T Business -- within the next two years.
It also will end a three-year effort led by AT&T Corp. Chairman C. Michael Armstrong to construct a massive telecommunications conglomerate able to deliver everything from cable television to the Internet -- an effort that has been roundly criticized by analysts and investors alike in recent months as AT&T's stock has floundered.
AT&T has long fought against breaking up its operations, first in 1968 when the U.S. Federal Communications Commission stripped it of its telephone equipment monopoly and then again in the 1970s when an antitrust suit led to the 1984 court-supervised break up that created the seven so-called "Baby Bells."
AT&T CEO Michael Armstrong talks to CNNfn about the changes and the company's better-than-expected earnings.|
Now, however, company officials hope splitting up the No. 1 U.S. telecommunications and cable concern not only will revive its own beleaguered stock price, but allow investors to focus on its high-growth operations without the stigma of its faltering long-distance businesses, which continues to see profitability erode.
"We have three really strong growth businesses and we have a huge declining business that shrouds all of these businesses," AT&T
Chairman and CEO Michael Armstrong told CNN's Ahead of the Curve. "[This is] going to provide a foundation and a path to let these business realize their value in the marketplaces."
Still, some analysts called the move a concession that the company's growth-driven acquisition strategies of the last few years were off-target, an argument Armstrong vigorously disputed.
"There seems to be a lot of fun in reporting that this is a reversal of our strategy," Armstrong said in a conference call with analysts and reporters Tuesday. "I find that not only wrong, but offensive. I'd like to assert that the creation of these four companies is the foundation for value creation.
"We set out to transform this company from a point-to-point long-distance company. The results today are strong. They need to be better, and they will be. But it's now time to recognize the value creation phase of our strategy."
Still, the initial reaction on Wall Street was tepid, at best. AT&T (T: Research, Estimates) shares fell $3.50, or more than 13 percent, to close at $23.38, continuing what has essentially been a year-long slide for the New York-based company.
Additionally, the company was immediately downgraded by Merrill Lynch analyst Adam Quinton to "accumulate" from "buy," primarily because of the continued weakness in the company's business and consumer services shown in the third-quarter earnings report, released separately Wednesday.
Salomon Smith Barney analyst Jack Grubman also downgraded the stock to "neutral" from "outperform," saying he believed the company's core long distance business "is melting down" while a full restructuring could take up to two years to implement.
And, while the company's third-quarter results were slightly better than forecasts, AT&T also issued a new earnings warning for the fourth quarter.
"The issue has been has been and continues to be the decline in AT&T's core businesses, both on the consumer long distance side and in its business services side," said Mel Marten, a senior telecom analyst with Edward Jones. "On the consumer long distance side, the decline was expected, but the magnitude wasn't."
Still, Armstrong offered no apologies for his strategy to beef-up the company the past few years, which included the multibillion acquisitions of cable companies TCI and MediaOne Corp., in an effort to bundle its services across several product lines.
Since arriving at AT&T in 1997, Armstrong has advocated a strategy of diversification, hoping to create a one-stop shop for telecom services that would move the company away from its focus on providing long-distance services.
He said Wednesday's announcement was the final phase of that strategy.
"We set out to transform this company from a point-to-point long distance company," he said. "I am personally convinced that what we have put together is going to add tremendous value."
The restructuring will begin in earnest later this year when AT&T offers its shareholders the ability to exchange some of their shares in AT&T Corp. in a tax-free swap for about $10 billion worth of stock in AT&T Wireless (AWE: Research, Estimates). The telecom company created a tracking stock for its wireless operations earlier this year in a $10.6 billion initial public offering, but retained an 85 percent stake in it.
The AT&T Wireless tracking stock then would be converted into a separate asset-based stock by distributing the remaining shares to current shareholders, likely during the summer of 2001.
At the same time, AT&T intends to create a tracking stock for its broadband unit, which includes its pay-television, high-speed Internet access and multi-channel video operations. AT&T's 25 percent equity interest in Internet service provider Excite At Home Corp. (ATHM: Research, Estimates) is expected to be included in the new company.
Like the wireless unit, the broadband tracking stock also will be converted into an asset-backed stock within 12 months of its IPO.
During the third quarter of next year, AT&T will create a new consumer communications and marketing company, to be called AT&T Consumer, that will operate its existing residential long-distance and WorldNet Internet access business. AT&T will create a tracking stock for that company as well, and distribute 100 percent of the shares to current shareholders.
That will leave the telecom company's remaining businesses, comprising essentially its enterprise communications and networking operations, to operate under the AT&T Business name and ticker symbol "T" on Wall Street. That unit will continue to operate the company's 50 percent interest in Concert, an international communications services venture with British Telecom.
AT&T will appoint a special stock committee to help oversee the operations of each company while it operates under a tracking stock. AT&T Wireless and AT&T Broadband will appoint their own boards of directors once they become asset-backed securities.
Though it essentially plans to split its operations four ways during the next two years, Armstrong emphasized that each of the new companies will retain commercial arrangements to work with the others, allowing AT&T to continue bundling its wide assortment of products and services.
"We have agreements between these companies so they will use each other throughout their life," Armstrong said. He said the arrangements will last approximately 5 years or so but could be extended.
Dividends to be cut
Implications of the four-way split target shareholder value, including what the company said will be reduced dividends for investors.
While AT&T's board still is reviewing dividend plans, which won't be finalized until the end of the year, the company said it expects the four new companies' combined dividend will be substantially less than AT&T's current payout.
"The aggregate payout will be reduced," Armstrong confirmed on CNNfn. "Cash flow will not go to dividends but into growth...the dividend payment will be appropriate to the companies' peers in the industries that they compete in."
For example, AT&T said, its Consumer business is expected to allocate a greater portion of its earnings to dividends. However, like its wireless unit, AT&T Broadband will initially devote most if not all of its excess cash into growing the company.
BT talks, service bundling to continue
Armstrong also told CNNfn that AT&T's split will not affect its ongoing talks with British Telecommunications PLC. AT&T will keep its 50 percent stake in the companies' joint venture, Concert, and "we will discuss different alternatives and continue to have discussions," Armstrong said.
BT officials were clearly hoping to expand their relationship with the U.S. telecom as part of the reorganization. Some speculated the Britain's biggest fixed-line operator might even make a bid to acquire AT&T's business services operation.
But Armstrong made no mention of such talks Wednesday and, when pressed on the issue, indicated the ongoing discussions are limited only to enhancing the relationship as it relates to Concert.
As for Armstrong's future, he wouldn't comment directly on management for each business, but told CNNfn he expects to remain chairman and CEO and "see the transition through" its 2002 expected date. He declined to comment on what his future held beyond that point.