AT&T Again Mulls Tracking Stock

A spinoff could see the success of Sprint PCS ... or underperform like most tracking stocks.
Author:
Publish date:

Call it

AT&T

(T) - Get Report

spinoff lite.

The nation's telecom giant is drawing up blueprints to split its consumer long-distance unit and its business communications services from its risky cable and wireless ventures, according to a banking source familiar with the talks.

Although on Friday AT&T officials met with a group of investment bankers, at least three investment banks have been consulted about alternative tracking stock options. One possibility mulled by AT&T is for a single tracking stock for its broadband cable operations, while another option is to create multiple tracking stocks for cable, wireless and even the business solutions division, said the banking source, who expects an announcement as early as next month.

AT&T officials would not comment on the immediate possibility of issuing a tracking stock, but the company has in the past stated that a such a move remains an option, especially if the nation's most widely held stock loses ground.

To some analysts, that moment is now.

By staking its future on cable, AT&T is entering a new and riskier territory, and in the process, has lost investor confidence. Since June 23, 1998, the day before AT&T announced it was acquiring the No. 4 cable provider

TCI

, AT&T stock has gained a paltry 13%. During that same period, an index of telecommunications service companies has risen 37% while rival

MCI WorldCom

(WCOM)

has seen a 64% share-price increase.

Off the Track
Stock price of AT&T, MCI WorldCom, Sprint vs. Telecomm-Long Distance Industry Index

Source: Baseline

"I'd say it is unreasonably undervalued today," says analyst Blake Bath, who follows AT&T for

Lehman Brothers

. Bath has a buy on AT&T and Lehman advised

MediaOne

(UMG)

in the pending AT&T acquisition.

If you subtract all the costs and acquisitions related to its cable ventures, "AT&T would be trading at a little less than five times cash flow right now," says Bath, who favors a tracking stock.

AT&T executives are aware that efforts to rebuild residential cable systems to carry two-way TV, Internet and telephone services could drag down the stock. The company first outlined a tracking stock strategy last year as part of its merger agreement with TCI. Initially the plan called for breaking up the company into consumer and business units. But as the stock price rose in January, AT&T executives backed away to focus on more cable acquisitions.

Today, AT&T is beset by a number of challenges such as a long-distance phone price war as it moves to complete the MediaOne deal, which is expected to close early 2000. The stock is down 24% from its 52-week high reached in February. The falling share prices could hurt AT&T's finances -- the MediaOne deal stipulates that AT&T would have to kick in additional cash to offset any shortfall if share prices fall below $51.30. On Friday, AT&T stock closed at 46 7/8, down 1 5/16.

AT&T also faces a potentially damaging regulatory decision that could limit its control of the nation's cable market, which may force it to sell off part of its cable properties in a fire sale. At the same time, AT&T is facing pressure from open-access groups who want to force Ma Bell to allow competitors onto its new cable systems.

These risks, say tracking stock advocates, could best be confined to separate operations with different value measurements. Just look at how

Sprint

(FON)

packed away its wireless operations in tracking stock

Sprint PCS Group

(PCS)

. Since its November IPO, PCS shares have soared 248% while the mothership Sprint has seen only a 41% rise.

In its most recent discussions, AT&T has been looking to realign itself along slow-growth business vs. high-growth business, according to company sources and analysts.

Under this scenario, consumer and business services, which amounted to $45.9 billion in revenue in 1998, would remain under the current "T" ticker symbol. The $5.4 billion wireless business could be given its own tracker or lumped in with the cable venture, which includes TV and high-speed Internet and is projected to have $9.2 billion in revenue next year. AT&T's $3.5 billion business solutions unit could also gain a separate trading symbol.

"Starting a tracking stock is always out there as a possibility. But depending on the stock price and market environment, sometimes it is a louder issue than others," says analyst Richard Klugman, who follows AT&T for

Donaldson Lufkin & Jenrette

. Klugman is neutral on a tracking stock and has a buy on AT&T. DLJ advised TCI on the AT&T merger.

However, not everyone is a fan of tracking stocks. Brian Hayward, the manager of $870 million

Invesco Worldwide Communications Fund

, says tracking stocks amount to little more than a placebo. "They ignore the man behind the curtain pulling the strings," he says.

Hayward sold two-thirds of his fund's AT&T investment on the day of the TCI purchase announcement and now only holds a small position in the company.

A word of caution to the wise. Nearly all of the 23 tracking stocks created in the past 15 years have underperformed, says Mark Minichiello, who monitors the tracking stocks for

Spin-Off Advisors

, a Chicago-based research firm. PCS is one of the few exceptions so far, which Minichiello attributes to the flood of investment money looking for opportunity in the telecom sector.

"Tracking stocks could be the flavor of the month because telecom is hot right now," says Minichiello.

As originally published, this story contained an error. Please see

Corrections and Clarifications.