As part of its plan to split its major businesses--wireless, consumer, business and broadband--into separately traded companies, AT&T gave its shareholders an opportunity to exchange AT&T shares for shares of AT&T Wireless in a tax-exempt trade.
AT&T expects AT&T Wireless, the No. 3 U.S. wireless telephone services company, to be an independent company by the summer. AT&T Wireless shares, which trade as a tracking stock, will be redeemed for shares in an asset-based AT&T Wireless common stock.
Shareholders who took up AT&T's offer will receive 1.176 shares of AT&T Wireless for each share of AT&T common stock.
AT&T had set a limit on how many of its own shares it would exchange in the offer at 427.7 million, roughly 55 million shares more than shareholders were willing to part with for the fastest-growing of AT&T's four business units.
"It's surprising on some level because AT&T Wireless is clearly the best investment, from a growth perspective, of them all," said Bill Schaff, portfolio manager for the Berger Information Technology Fund in San Francisco. "What this means is that for a lot of reasons some people are not willing to bet on something that doesn't have any profits at this point, even if sales are growing at a fast rate."
Other analysts say AT&T's investor base played a role in the lower-than-expected conversion of AT&T shares for AT&T Wireless stock.
"There's no doubt the exchange was somewhat undersubscribed," said Drake Johnstone, an analyst at Davenport & Co. "I think it's a case where AT&T has a lot of older and more conservative shareholders who aren't as inclined to trade out their beloved Ma Bell stock for a stake in what some perceive as a much riskier investment."
In its latest quarter, AT&T Wireless posted a loss of 2 cents a share on sales of $3.21 billion. The company is not expected to turn a profit until the second quarter of fiscal 2002.
But that $3.21 billion in sales marked a 46 percent improvement from the year-ago quarter when it recorded sales of $2.2 billion.
AT&T managed to slip past analysts' reduced estimates in its first quarter, earning 5 cents a share on sales of $16.76 billion. However, sales only improved 5 percent from the year-ago quarter, and the company warned that sales and earnings for the second quarter would fall well short of analysts' estimates.
"That's the interesting thing about this exchange," Schaff said. "I recommended that all my clients take the AT&T Wireless stock. The fact is the wireless business is in a much better position than the parent company. Wireless may be a bit of a commodity business, but it's clearly growing faster than the core businesses of AT&T. The long-distance business is a dying animal."
Excluding about $3 billion of AT&T Wireless stock AT&T plans to hold for later disposition, AT&T will distribute its interest in AT&T Wireless as a dividend to AT&T stockholders at the time of the split-off.
In the past year, AT&T shares have underperformed the Standard & Poor's 500 index by more than 30 percent.
Back in December, AT&T gave its shareholders even more bad news when it announced it would reduce its annual dividend by 83 percent, the first reduction in the company's 125-year history.
AT&T said it would pay investors 3.75 cents a share each quarter, or 15 cents a year, starting in 2001. The company had paid a dividend of 22 cents a share each quarter, or 88 cents annually, amounting to about $3.38 billion in dividend payments every year.
Company executives said the dividend reduction would save it about $2.8 billion a year.
AT&T shares are trading below $21 a share, well off the 52-week high of $37.75 established in June. Ten of the 18 analysts tracking the stock rate it either a "hold" or "sell."
AT&T Wireless, trading around $17 a share, peaked at $30.06 in June, and 14 of the 18 analysts following its stock rate it either a "buy" or "strong buy."
"That this exchange wasn't oversubscribed shows just how fast this market has changed," Schaff said. "People are more inclined to stick with a predictable stream of earnings and cash flow than invest in a high-growth company that's still losing money."