With the merger of its broadband unit with

Comcast

(CMCSA) - Get Report

completed,

AT&T

(T) - Get Report

returns to its roots as the nation's largest long-distance company. Investors holding the so-called "stub" ticket left over after the broadband transaction can safely assume the company isn't bound for its old glory. But could the stock nevertheless be an attractive value?

An investor considering buying the AT&T stub must realize from the outset that he is buying into a business with few prospects for growth. The long-distance unit of AT&T posted a loss of $12.7 billion in the nine months ended September 2002. Revenue declined 9% to $36.04 billion, and gross margins drifted down another 3 percentage points, to 16%. Margins are expected to continue to shrink as competitors such as

Verizon

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win access to the long-distance market. Indeed, on Monday, Lehman issued a report downgrading the shares due the belief that "nothing can reverse the trend-like declines in revenue and EBITDA at

AT&T's consumer long-distance unit that would otherwise leave the unit at EBITDA break-even by 4Q03."

So on what basis might value be realized? AT&T shares closed at $13.90 on Friday. The Comcast exchange rate gives the broadband unit an implied value of roughly $7.35, making the stub worth about $6.55. AT&T will also carry out a 1-for-5 reverse stock split in an effort to keep the stock above the $5 threshold required of most mutual funds. The reverse split will cause the outstanding shares to fall from 3.85 billion to 770 million, and the number of shareholders to decrease by some 300,000, as those owning fewer than five shares will be cashed out.

The remaining 3 million AT&T shareholders will also control about 56% of Comcast, receiving roughly one share in the merged broadband unit for every three they hold in AT&T. Comcast will be carrying $32 billion debt, quite a load for a company that posted net income of $608 million on revenue of $9.6 billion in 2001. And it's important to note the broadband business, so coveted for its growth, showed year-over-year revenue growth of 8.2% in the third quarter to $2.5 billion, but it posted a 2% sequential decline in the same period due to lower ad revenue and loss of subscribers to satellite television.

While the decline of AT&T seems preordained to some, the stock does have some qualities that could make it a viable investment in the near term. The most attractive result of the broadband sale is that AT&T suddenly becomes one of the most financially stable telecom firms in the country. After much haggling, the $50 billion deal ($30 billion in stock and $20 billion in debt) will reduce AT&T's debt from about $34 billion to $23 billion. According to a report by Scott Shiffman, an analyst with Lehman Brothers, this should bring net leverage, as measured by gross debt vs. cash, down to 1.5 times from 2.86 times. Competitors such as Verizon and

Sprint

sport ratios of 2.9 and 3.1, respectively.

The stub is estimated to have cash before debt of about $8 billion, or $2.07 a share before the reverse split and $10.35 after. Aside from the transference of debt, AT&T should receive a $6 billion cash payment from Comcast related to intercompany debt between broadband and long distance. Analysts think Comcast will be able to come up with the money through its divestiture of

Time Warner Entertainment

and other assets. That brings cash up to $3.63 pre-split and $18.18 post.

Another aspect of the deleveraging is that the dividend, currently at 1.1%, could be boosted to the 3% range. Given the current low interest rate environment and renewed investor emphasis on income over growth, money managers (institutions own about 60% of shares outstanding) may find AT&T a safe place to park money for another year or so.

WorldCom

remains a wild card in the industry. The longer it remains stuck in bankruptcy, the greater the opportunity for AT&T to steal valuable corporate accounts, boost market share and stabilize margins. But ultimately, WorldCom's possible debt-free emergence from bankruptcy poses the real risk of a renewed a price war, increased margin pressure and a furthering diminishing of AT&T's hope of sustained profitability.

One rarely mentioned catalyst for price appreciation is that AT&T is now the last "pure play" long-distance company. With its dominant market share of 50 million residential customers and 4 million corporate customers (compared with Verizon's 9.8 million U.S. long-distance customers), and a market capitalization of just over $11 billion (compared with Verizon's $100 billion), the stock might attract some takeover interest. While the premium may be small over its current price, the prospect could imply a floor.

A reasonably secure, dividend-paying stock for at least a few years -- hey, sounds a little like the old AT&T.