After years of dwindling numbers,

AT&T's

(T) - Get Report

withering consumer long-distance business has finally landed on Wall Street's endangered species list.

Once a profit center reaping $20 billion in annual revenue, the consumer business is now in peril and likely to be shut down or sold late next year, says Lehman Brothers analyst Blake Bath. In cutting the stock to sell from neutral Monday, the analyst says the company's business services unit retains some value but is being dragged down by the staggering home long-distance business.

The discouraging words come just as AT&T investors prepare to face the brave old world of pure-play telecom stockholding. Bath's report coincides with the carve-out of AT&T's cable business in a merger with

Comcast

(CMCSK)

and an accompanying 1-for-5 reverse split of the remaining AT&T common shares. Those moves, expected to take effect later today, will reverse once and for all the company's four-year-old dalliance with the cable business and all the broadband synergies it once promised.

An AT&T spokesman declined to comment on the report, but Wall Street was bracing for a rough transition. AT&T shares, up more than 50% from their late summer low, fell 75 cents to $13.11 Monday.

Diminishing Returns

Severely challenged by cheap wireless calling plans and new long-distance offerings served up by the regional Bells, AT&T's consumer business has been evaporating at a rate of about 20% a year, according to the Lehman report. And despite the giant telco's efforts to cut costs, the revenue declines have been outpacing expense reductions.

Those trends will quickly turn what has been a cash cow even through the lean years into another source of red ink, Bath predicts. At the current rate, costs at AT&T's consumer business will start to exceed revenue sometime after the close of 2003, Bath says.

Many investors, looking beyond the Comcast merger, saw the remaining AT&T business as a strong survivor in the phone industry given the strength of its business services unit. But calculating the value of the business services operation usually involved subtracting the declining consumer business and its $4 billion in connected debts.

It's "an unsustainable business and we therefore assign zero equity value to Consumer," Bath wrote in the report.

AT&T, which is offering local phone service in eight states, says there are still many opportunities available in the consumer business.

But some analysts and investors say Bath's report and subsequent downgrade lays bare the fundamental troubles that AT&T faces in a highly competitive market.

"It was an aggressive call, going out now with the Comcast deal and the reverse split happening today," says Chris LaSusa, an analyst with Circle T Partners, a New York-based hedge fund. "But this is nothing new -- consumer long distance has been declining smoothly for several quarters now." LaSusa recently covered his short position on AT&T and has no position now.

By Bath's calculations, AT&T common stock -- basically the remaining business services unit post spinoff -- has a target price of $5 per share, or $25 after the reverse split.

Of course, Bath's not saying AT&T shareholders are completely left holding the bag in this deal. He notes that AT&T shareholders will receive about one share of the new Comcast AT&T for every three shares of AT&T common they held when the merger becomes effective. And Comcast has been among the most effectively managed cable operators, raising some hope that perhaps that investment will perform solidly.

Growing Up

Yet optimism is in short supply throughout telcoland, especially when it comes to long distance. Sure, some operators have had success recently: Though the Baby Bells have seen their own core local phone businesses decline,

Verizon

(VZ) - Get Report

,

SBC

(SBC)

and

BellSouth

(BLS)

all posted growth in long-distance sales last quarter. Verizon, now the nation's No. 4 long-distance company, said that it had managed to turn profitable already in long distance, almost entirely at AT&T's expense.

But with loads of free anytime minutes flooding the market from wireless telcos, and cable companies outfitting their networks for phone service, industry experts are far from optimistic about traditional long-distance business even in the Bells' hands.

At this rate, AT&T's once-formidable long-distance venture is quickly going from the

Dojo to the

Dodo.