In March, AT&T, which owns a majority stake in Excite@Home, gave cable companies Cox Communications and Comcast the option to sell holdings of 30 million shares each of Excite@Home at $48 per share, in exchange for their board seats.
AT&T agreed to make up the difference between the $48 price and Excite@Home's actual stock price, trading today at $10.44. If Cox and Comcast exercise this option, AT&T could take a hit of up to $2 billion. Cox and Comcast have an 18-month window, beginning in January, to exercise this option.
"We believe this is not yet factored into 'Street' consensus estimates for 2001," Salomon Smith Barney analyst Jack B. Grubman wrote. "With Excite@Home trading at $12 per share, there would be a $2 billion liability on AT&T's balance sheet if AT&T had to file a 10Q today," he wrote, referring to a quarterly earnings statement filed with the Securities and Exchange Commission.
Grubman cut AT&T's rating to "outperform" from "buy" and lowered his earnings projections for 2000 to $1.65 from $1.73, and for 2001 to $1.55 from $1.97. He further justified his downgrade by saying the company has "sluggish fundamentals" and lacks the positioning of other telephone carriers.
"We believe AT&T is in a strategic bind," Grubman wrote. "It does not have the pervasive connectivity to end users like a Bell company, and also lacks the global data/IP network that WorldCom has."
At 1 p.m. PT, the close of regular trading, shares of AT&T fell $1.25 to $27.63 Friday. The stock has fallen more than 50 percent from its 52-week high of $61.
It is unclear whether Cox and, or, Comcast would want out of the Excite@Home deal. The partnership gives them an equity stake in the world's largest broadband provider, which also offers the cable operators high-profit margins for its high-speed Internet service. But with Excite@Home shares trading at a new 52-week low, a buyout price of $48 per share--nearly five times current value--may look attractive.
Telecommunications carriers, especially long-distance companies, have struggled recently on Wall Street as they face heightened competition. Where there used to be just three dominant long-distance carriers in the United States--WorldCom, Sprint and AT&T--there are now many more, including Global Crossing, Qwest Communications and Level 3 Communications. Some local carriers are also moving into the long-distance market.
Citing increased competition, Sprint warned on Sept. 20 that it expects earnings of 45 cents to 47 cents per share, slightly below the 49 cent consensus estimate by analysts at First Call/Thomson Financial. The long-distance carrier also said it anticipates revenue growth of only 4 percent.
"You have firms that are spending billions of dollars on telecommunications equipment, and the fear is that there's not enough money around to justify the money being spent," said Michael Hodel, a telecommunications analyst with Morningstar.com, a Chicago-based firm that tracks equities and mutual funds.
In his research note, Grubman further criticized AT&T for drawing much of its revenue from voice and private-line services, and not enough from high-growth areas of data/IP, Web hosting and managed services. Still, Grubman said AT&T's downside may be limited, as the company is trading down 53 percent from its 52-week high and is working to figure out how to restructure its company.
News.com's Corey Grice contributed to this report.