AT&T Ready to Set Wireless Free to Roam on Monday

Updated from 11:23 AM

Here we go, down the hatch. Be a good market and swallow a few billion shares of AT&T Wireless (AWE).

Investors may think they've had their fill of high-growth, cash-needy wireless carriers, but AT&T (T) isn't afraid of prying open the Street's mouth by force. A little more than a year after staging a $10.6 billion gut-buster IPO of AT&T Wireless tracking stock in a strained market, AT&T is spinning out the wireless carrier on Monday, July 9.

This will make AT&T Wireless an independently run company and will more than double the number of its shares on the market. More shares is good for AT&T Wireless in the long run, but in the near future the market will most likely drive the price of the stock down as it digests a massive number of new shares.

"There could be a fair amount of technical pressure from people selling out their wireless stakes," says Michael Kaufman of K Capital Partners of the next week in trading, as some of AT&T's value-oriented shareholder base unload the "high-multiple" AT&T Wireless stock. When AT&T Wireless becomes independent, however, things may get exciting. "Once the spin-out has occurred, AT&T Wireless becomes a potential takeout candidate. NTT DoCoMo already has a 20% stake."

It's a complicated deal at a time when rival wireless carriers are dying to offer debt, equity, anything to raise funds for further expansion. By Monday AT&T Wireless investors will hold common stock, rather than tracking shares, in an independent AT&T Wireless. AT&T Wireless stock rose 3.4% to $17.15 before the close of the market Friday and its after-market inclusion in the S&P 500.

First, a quick rundown of the numbers. A fewer-than-expected number of AT&T shareholder volunteers signed up for a 1-for-1.18 share swap in May that netted growth-hungry investors 437.7 million AT&T Wireless shares for 372.2 million AT&T shares. When the voluntary exchange closed, AT&T said it would distribute 1.14 billion shares to its less-adventurous AT&T shareholders, or 0.32 Wireless shares for every AT&T share held, to compensate them for the value of the wireless business that will no longer be a part of their AT&T holdings. AT&T kept $3 billion in AT&T Wireless shares for itself.

Standard & Poor's made that tactic understandable by announcing that the wireless carrier would be added to the S&P 500 at the end of trading July 6. Standard & Poor's has done the same with several spinoff stocks recently, such as Hewlett-Packard's (HWP) testing and measurement segment Agilent (A). AT&T plans to sell $1 billion of its $3 billion in Wireless holdings to S&P 500 index funds that need AT&T Wireless shares. Many funds will already get a good deal of AWE stock from their holdings of parent AT&T, but inclusion in the S&P 500 will absorb a range of more than 100 million to 117 million (estimates by Prudential and Lehman Brothers, respectively) in AT&T Wireless shares.

Now, for a little sorbet. It cleanses the palate. We move on to the next course.

After all is said and done, the AT&T Wireless float -- the number of shares outstanding -- will increase from 800 million to closer to 2 billion shares. Given the flood of Wireless shares on the market, the Street is preparing for AT&T Wireless stock to dip. Salomon Smith Barney analyst Michael Rollins advised his clients to be prepared for a 5% to 10% downside, but expects a 20% to 25% upside after the initial shock to the system because recently sluggish AT&T Wireless shares are priced attractively compared with the competition. Salomon has performed recent underwriting for AT&T.

Lehman analyst John Bensche took a look at 2000's large spinoffs and observed that in the first month "a spinoff is typically a positive catalyst for the parent stock and a negative catalyst for the stock being spun." He attributes that to a clearer idea of the parent company's value, as "transparency increases." He adds that joining the S&P 500 doesn't counteract initial downward pressure.

Also in the negative column, AT&T's $2 billion in Wireless holdings after the spinoff will be slightly disconcerting. Investors will be wondering if, how and when AT&T will be putting that on the market. So much for shaking off the influence of your parent company.

Finally, it's a competitive market when it comes to courting investors. Several wireless carriers would like to get shares to the market -- Sprint (FON) has been hoping since January to sell $3 billion in Sprint PCS stock to the public, and the Street expects Verizon (VZ) to spin out its wireless segment.

Deals don't get much bigger than this. AT&T is counting on investors' shrunken stomachs to handle the task in good health.

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