Our friendly neighbor to the north is generously hosting the latest billion-dollar mishap for

AT&T

(T) - Get Report

.

The phone and cable giant confirmed Friday that it is preparing a $2.25 billion stock offering next week to buy out the public stake in

AT&T Canada

(ATTC)

. In one of the more dazzlingly flawed deals in CEO Mike Armstrong's four-year tenure, AT&T agreed in 1999 to buy back the local phone upstart by next year, at preset prices well above what the market has proven willing to bear. Now the company is accelerating the buyout to avoid forking over next year's appreciation.

Shares of AT&T, which are among the most widely held in the nation, have been trading at an 11-year low, amid concerns that a new offering will further undercut the stock. Bulls point out that the company saves some money by closing the deal now, but investors already stung by the company's failed push into cable are surely not pleased. AT&T slipped 8 cents Friday, to $11.89.

Great Hopes

Like so many of the problems that have laid the telecom sector low in the last year or two, the AT&T Canada black hole had its roots in the network-building boom of the late 1990s. AT&T believed at the time that shares of this competitive local exchange carrier, or CLEC, would rise handsomely. It backed up its optimism by guaranteeing a 17% annual appreciation rate on its buyout price.

Alas, the bottom fell out of the local phone market soon afterward, leading to some $3 billion in charges at AT&T to reflect the disparity between what it must pay and the declining value of AT&T Canada's stock. AT&T, which owns 31% of its Canadian affiliate, expects to take an additional $1.1 billion charge this quarter.

Adding yet more absurdity to the deal, AT&T can't directly hold the AT&T Canada shares because of Canadian laws barring full foreign ownership of local companies. So AT&T will have to put most of its holdings into a trust of some kind.

Bad News

If all this sounds drearily familiar, perhaps it's because there has been no shortage of bad news during the Armstrong era. After sinking nearly $100 billion into cable acquisitions aimed at turning the company into the one-stop shop for business and consumer broadband, AT&T has reversed itself in a selloff that appears likely to fetch something in the $62 billion range when the dust settles. In a deal with at least superficial similarities to this one, the company also spent billions of dollars on Excite@Home, which has already all but vanished in bankruptcy.

Once AT&T completes the sale of the cable business to

Comcast

, the remaining phone and data business will likely trade in the single digits, an ugly prospect that the company plans to avoid by embarking on a rare

1-for-5 reverse stock split.

And while that move may have its cosmetic advantages, it will do little to address the weakening outlook for AT&T's underlying business. Falling sales, competitive pricing and staggering debts will continue to take their toll on AT&T and its competitors, observers expect. When Moody's lowered AT&T's credit rating Wednesday and put the company on negative watch, the agency cited the many challenges the company faces.

To be sure, bulls are quick to point out that AT&T remains among the most capable telcos when it comes to keeping its big-ticket corporate customers and riding out the lengthy telecom malaise. And few fans of the company are likely to shed any tears when Armstrong jumps to AT&T Comcast later this year.

Alas, most investors lack a comparable exit package.