AT&T Will Likely Pick Merrill to Underwrite Its Cable Tracking Stock

Two other AT&T units could also get tracking stocks, say people familiar with the situation. But any transaction isn't likely until early 2000.
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AT&T

(T) - Get Report

likely will select

Merrill Lynch

(MER)

to underwrite a tracking stock for its cable operations, and possibly two other divisions, according to two people familiar with the situation.

The transaction is unlikely before at least early 2000, says one of the people familiar with the details. The other two divisions are the company's wireless unit and its operation that outsources services for businesses.

Getting the AT&T deal would be a coup for Merrill Lynch, which was left out of the most recent telecom tracking transaction.

Warburg Dillon Read

and

Salomon Smith Barney

were the primary underwriters of the

Sprint PCS Group

(PCS)

tracking stock. Sprint PCS shares have risen 377% since that November offering, while

Sprint

(FON)

shares have climbed 86%. Of course, nearly half of Sprint's increase came this month thanks to its pending acquisition by

MCI WorldCom

(WCOM)

.

In addition, Merrill could score healthy fees. The average fee on recent tracking-stock offerings was 4.3%, according to

Thomson Financial Securities Data

. The dollar amount involved in the AT&T tracking-stock offerings remains unclear.

As

TheStreet.com

reported in August, AT&T was consulting with at least three investment banks about the creation of tracking stocks. Tracking stocks essentially allow investors to track the performance of a specific division within a larger company but don't represent an ownership stake like common shares.

Merrill and AT&T declined to comment on the investment banking issue.

But AT&T did say that creating a tracking stock was still an option. A tracking stock following its cable operations is most likely, though the company could issue as many as three tracking stocks. In a conference call with analysts Monday, Chairman and CEO Michael Armstrong said the company isn't "operationally ready" for a tracking stock yet. An AT&T spokesman declined to elaborate.

Some analysts interpreted Armstrong's remark as a sign that AT&T might be more prepared to issue a tracking stock after it completes its acquisition of

MediaOne

(UMG)

, the nation's No. 4 cable company. That deal is expected to close early next year.

AT&T shares closed Thursday at 46, up 2 on the day. That's well off their 52-week high of 64 1/16. Since it staked its future on cable with the June 1998 acquisition of cable provider

TCI

, AT&T has been under pressure from Wall Street and board member John Malone to separate the costly cable and wireless operations. The reason: They're perceived to be dragging down the otherwise profitable long-distance and business services divisions.

"A tracking stock is a very smart idea, especially for those people who are looking at AT&T as a traditional telecom/datacom play and who would prefer AT&T not tie themselves to this mess that is cable," says William Klein, who covers telecom services for

Wasserstein Perella

. "It's a cleaner way of playing voice and data." (Klein has no rating on AT&T. Wasserstein hasn't performed underwriting for AT&T.)

AT&T executives have been aware from the beginning that efforts to coax old cable systems to handle the triple duty of 200-channel TV programming, high-speed Internet access and phone service could be costly and complicated.

Staff reporter

Gregg Wirth contributed to this story.