AT&T Sulks Toward Reverse Splitsville

We already knew Ma Bell was selling the house. But Wednesday's plan to move into a trailer park took everyone by surprise.

Facing the prospect of a $4 stock after its cable business is sent packing to Comcast (CMCSK - Cramer's Take - Stockpickr) land, AT&T (T - Cramer's Take - Stockpickr) Wednesday proposed a 1-for-5 reverse stock split to help boost its soon-to-be-orphaned share price.

The move is highly unusual for a blue-chip company, seeing as reverse splits, in which the shares outstanding are reduced, are more typically the province of outfits that are stuck on the pink sheets. But so goes the grand legacy of Ma Bell. After a $100 billion roll-up aimed at gussying her up into the new, hard-hitting Ma Cable, AT&T now faces the prospect of returning to the puny phone business, which itself is facing some difficult times.

"There's something terribly profound about AT&T, a mid-cap stock, doing a reverse split to maintain a respectable stock price," says Jefferies analyst Richard Klugman, who has a hold rating on the stock. "I think it says something larger about the dire state of the telecom industry."

Bubble Yum

Observers say the plan, disclosed in the company's annual proxy statement, is yet another clear offshoot of the bubble market's fitful contraction. The late 1990s boom was best known for investors' eagerness to pour money into any company that could claim to capture new riches through the presumed breakneck growth of the Internet. But since then it has spawned assorted other problems, such as the mountainous debt that now threatens to consume the entire industry.

AT&T hired C. Michael Armstrong to lead the aging communication titan into the Internet era. He immediately steered the ship toward cable, buying TCI Telecom and then MediaOne in an unparalleled $100 billion buying spree. Yet even as Armstrong was proclaiming that AT&T would become the one provider of Net, wireless and landline phone communications, investors fled in panic.

AT&T's core business, long distance, was evaporating faster than expected. The 60 million monthly paying-customer cash machine, which was intended to fund the cable and wireless expansion efforts, was running dry. Once that leg was pulled from under the stool, stock and bonds became the financing foundation. Of course, those cash sources also ran dry.

Within months of closing his final deal, Armstrong was forced to ditch the grand plan, by drawing up a new blueprint that split the company into four pieces: cable, consumer phone, wireless and business services.

New World Order

AT&T wasn't alone. Far too many "next generation" phone companies like WorldCom (WCOM - Cramer's Take - Stockpickr), Qwest (Q - Cramer's Take - Stockpickr) and Level 3 (LVLT - Cramer's Take - Stockpickr) had entered AT&T's market with vast new networks to fill and deep price cuts to lure customers away. The ensuing oversupply of network capacity and freefalling prices has introduced the era of collapse in telecom, as Global Crossing and PSINet went under and the likes of Williams Communications and Metromedia Fiber are teetering on the brink.

"It's an entirely new world now," says Jefferies' Klugman. A backlash from the heady days of network expansion and stock splits, AT&T's reverse split "is the first I've ever seen in telecom," he says.

If AT&T common shares were trading today minus the cable business, analysts estimate the share price would be about $4.30. If there were a reverse 1-for-5 stock split, that price would be in the $22 range.

And while unprecedented and largely cosmetic, the move is somewhat understandable, says Klugman. "People feel comfortable owning $20, or $30 or even $40 stocks," he says, not stocks in the low single digits.

Without its cable business, AT&T will most closely resemble archrival WorldCom, the nation's No. 2 long distance company. And speaking of $4 stocks, WorldCom tumbled to its seven-year low today, closing at $4.77.

Maybe WorldCom could take a clue from the broken champ.