AT&T

(T) - Get Report

shareholders, all 4.8 million of you, have received a thick envelope that poses a simple question: Do you want to swap some of your AT&T common stock for

AT&T Wireless Group

(AWE)

tracking stock?

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Yes you do, experts say. Though AT&T Wireless must confront big technological challenges and compete with faster-growing rivals, it boasts much stronger growth prospects than its parent, say investors. And while AT&T Wireless shareholders forgo the dividend that holders of AT&T common receive, investors say the fast-growing wireless industry should make AT&T Wireless the better-performing of the two stocks.

What It Is

Through May 25, AT&T shareholders have the option to receive 1.176 wireless shares for each AT&T share they tender, with the provision that no more than 427 million shares -- about a ninth of AT&T's shares outstanding -- will be accepted. That means that shareholders likely won't have the option of trading their entire AT&T stake for wireless shares. But even those who keep all their AT&T stock now will end up with wireless shares this summer, when AT&T is due to spin off the rest of that operation to shareholders.

The swap offer is the first phase of AT&T's planned four-way split, due to be finished later this year. The nation's No. 1 long distance and cable service, wracked by sharp revenue declines, a mountain of debt and overwhelming costs associated with launching its cable broadband service, last October moved to split along business lines to become more nimble and customer-focused.

Investment pros like the way AT&T has sweetened the swap by giving AT&T common stockholders what at current prices amounts to a 3% premium on the exchange. But what they really like is the wireless business, which AT&T Wireless gives shareholders a chance to play.

Going Yard

Bill Trent, who manages telecom investments for New Jersey's state employee retirement fund, says that given the opportunity to swap, he would take as much wireless as he could: "I'd prefer the wireless as a long-term holding." Trent's fund has positions in both stocks.

Low-Wire Act
Tracking falling wireless stocks

Trent's not alone. Apparently, the nation's third-largest wireless-service provider isn't appealing just to the pension fund types. Some short-term traders also seem to like what's being offered, or at least as it compares to the sputtering parent AT&T.

"Tendering for AWE is a no brainer," says a New England-based hedge fund manager whose firm has a position in AT&T Wireless. "I'd swap it all. In my mind, it is a first-class wireless company with a very strong customer base, balance sheet and brand name.

"Bottom line, right here, AWE is a better investment than T," says the hedge fund manager, who asked not to be identified.

Nice endorsement, but there are caveats.

Bring on Da Funk

Industry observers, including the investors interviewed for this story, say the wireless industry isn't an attractive place to put money right now. After an era of land-grabbing consolidation, which gave independent wireless companies highly inflated values as takeover targets, the industry has sunk into a postboom funk.

New-subscriber growth has slowed and customers are defecting, just as the wireless-service industry faces the costly proposition of having to buy new airwave licenses and new third-generation, or 3G, networking equipment to deliver Internet capabilities to cell phones.

The particular slap against AT&T Wireless is that it operates at a technological disadvantage to some of the other wireless telcos because it is built on a time division multiple access, or TDMA, format. Rivals such as

Sprint PCS

(PCS)

and

Verizon

(VZ) - Get Report

use a code division multiple access, or CDMA format, which upgrades to 3G more easily.

Investors such as New Jersey pension fund manager Trent use Sprint as an apt comparison to highlight the trade-offs with AT&T Wireless.

"AT&T Wireless has one of the best balance sheets in the business, but it will have to invest in some spectrum and faces a more difficult upgrade to 3G," says Trent. "Sprint has an easier upgrade path but a weaker balance sheet." Trent has a position in Sprint PCS.

"The technology migration from TDMA to 3G will be expensive," says the hedge fund manager. "But AT&T Wireless can afford this easily."

One of the issues that hangs over this particular swap is that the market anticipates a negative impact from the flood of AT&T Wireless shares that may hit when AT&T distributes the remaining 65%, at an unspecified date this year. If a lot of investors decide they don't want the wireless issues, then the price will plunge as they dump it.

Some investors believe that once that concern is lifted, AT&T Wireless stock will rise appreciably sometime after the distribution.

Or as the New England hedge fund manager says: "With AWE at this valuation, I don't think you can lose."