AT&T makes its four-part breakup official

After much anticipation, the telecommunications giant acknowledges it will spin off its cable and wireless units and list a tracking stock for its consumer services division.

6 min read
It's official: AT&T chief executive C. Michael Armstrong is blowing up the empire he has spent the past three years constructing.

Gartner fellow Ken McGee says there is little value in the restructuring for the new AT&T Business and Consumer companies, but AT&T Wireless and AT&T Broadband may benefit.

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In a conference call with analysts and media Wednesday, Armstrong and other company executives outlined a four-way deconstruction of Ma Bell, with the broadband and business units becoming separate companies and consumer services being listed under a tracking stock with its own chief executive.

"This was probably the worst-kept secret in the history of corporate America," Armstrong joked in the meeting with analysts Wednesday. While he promised as many details as he could on the restructuring, he admitted "there are still some things about the business (restructuring) we don't know."

The move comes as AT&T attempts to reverse a stock slide that has brought it to consistently lower 52-week lows, with investors concerned about double-digit revenue declines in the consumer long-distance business and slower-than-expected growth in business services. The news overshadowed AT&T's announcement Wednesday that its third-quarter earnings were 35 cents per share, a penny short of expectations.

The parent company, trading under the famous symbol "T," will be AT&T Business, headed by Armstrong. AT&T Consumer will be under that company, with a tracking stock that will debut in the third quarter of 2001. Currently, that division contains both consumer long-distance and AT&T's WorldNet dial-up Internet service.

Armstrong said AT&T will invest in developing AT&T Consumer, whose growth has been impeded in recent years as other segments of AT&T have tapped into its high cash flow. Such an announcement is important to investors wondering why they should invest in a tracking stock for a unit that is posting continued revenue and growth declines. One area of development for Consumer would be to build a digital subscriber line (DSL) business.

The other two units--Wireless and Broadband--will license the AT&T brand from AT&T Business, and all four units will have partnership agreements on various services.

AT&T Wireless, currently with a tracking stock, will be its own asset-based company by next summer.

The cable standalone, AT&T Broadband, will begin with an initial public offering next year by AT&T, then be converted to a separate company in 2002, AT&T said. Since those cable assets were bought so recently, AT&T must use this method to avoid huge tax penalties.

Although the plan could bear some financial fruit in the markets, it will take considerable time to work itself out on the strategic level, which could in turn ripple through AT&T's ability to keep and hold its customers, some analysts said.

"This move screams of desperation," said Jilami Zeribi, a telecommunications analyst with Current Analysis. "This is going to confuse their customers. It's going to confuse their investors."

Armstrong indirectly defended his strategy of acquiring two major cable companies, which AT&T now is spinning off, while denying that the company is acting solely out of panic due to its low stock price.

"I hope to dispel that this was done for any short-term purpose," he told analysts. "We had to bring together the (cable and wireless) assets to see story: Weak business tracks spun off transform ourselves" from a consumer long-distance company, Armstrong said, adding, "Now we're forging a path to value creation for this company."

The move doesn't bode well for AT&T's original strategy of bundling services together into a one-bill package of voice, video and data, although Armstrong noted that the various companies will be able to work together in some capacity to provide packages of services.

But Zeribi said that consumers' demand for bundled services may have been overrated by analysts in the past--a miscalculation that may have helped bring AT&T to today's unfortunate juncture.

That demand "hasn't materialized yet," Zeribi said. "At this point there is some reconsideration of how consumer services need to be priced and packaged."

The AT&T board has not named CEOs for the Broadband and Consumer Services units. Daniel Somers is president of Broadband, and Robert Aquilina and Howard McNally are co-presidents of Consumer Services. John Zeglis will remain chairman and chief executive of AT&T Wireless.

The changes will likely affect the way investors view AT&T stock. Traditionally a significant dividend provider, AT&T said in a statement it is reevaluating its dividend policy.

Of the four stocks that will be traded after the breakup, the consumer unit tracking stock is expected to provide fairly high dividends, in keeping with the expectations of traditional AT&T investors. However, AT&T said the combined dividends of the four companies are expected to be less than that of AT&T currently, as more money is reinvested.

Armstrong told analysts Wednesday that each of the four AT&T stocks will have "dividends appropriate to the industries and sectors and markets that they serve."

AT&T will file a detailed restructuring and stock-swap plan with the Securities and Exchange Commission. The company also expects to undergo federal regulatory scrutiny.

One agency that could have concerns is the Federal Communications Commission. That agency approved AT&T's purchase of cable giants Tele-Communications Inc. and MediaOne Group on the promise that an integrated AT&T would introduce local-phone service to compete with the Baby Bells. FCC Chairman William Kennard and others could fear that such a move would be less likely if AT&T Broadband were to be spun off as a separate company.

Armstrong told analysts that he and AT&T general counsel Jim Cicconi "met with Chairman Kennard yesterday afternoon and had a good discussion." Armstrong said that "at that meeting, anyway, (Kennard) saw no regulatory issues to share with us."

Falls short on earnings
AT&T posted earnings per diluted share of 35 cents, a penny below analyst estimates and 30 percent less than the 50 cents per share posted in the same quarter last year. AT&T attributed the drop to costs related to the MediaOne acquisition.

Revenues for the quarter, which ended Sept. 30, were $17 billion, up slightly from $16.3 billion a year ago.

The Business Services unit posted revenues of see story: Telecom downturn $7.1 billion, compared with $6.9 billion a year ago, driven primarily by data and Internet Protocol (IP) outsourcing services.

Armstrong told analysts that in business services "we have not been doing as well as we should" but argued investments in IP centers nationwide are turning that unit around.

Consumer Services had $4.7 billion in revenue, continuing its pattern of double-digit percentage declines, as it was down almost 11 percent from the $5.2 billion posted for the same quarter last year.

Armstrong said the decline in long-distance revenue is an inevitability that applies to all competitors in the sector but that performance in the consumer division could be turned around with new investments. "We intend to stem that decline in time with a DSL strategy."

AT&T chief financial officer Chuck Noski told analysts that the consumer unit would conduct a voice-over-DSL trial in 2001.

Wireless posted $2.8 billion in earnings, up a whopping 195 percent from the same quarter last year. The company attributed the earnings growth primarily to a 38 percent increase in subscribers, many of whom came as a result of system acquisitions.

It was this unit for which Armstrong demonstrated the most enthusiasm, calling its performance "really terrific."

Broadband earnings rose almost 11 percent over the same quarter last year to $2.4 billion. Cable phone service and high-speed data contributed to the growth, AT&T said.

Armstrong said that AT&T Broadband added an additional 126,000 cable phone customers in the third quarter, "and we're on target to meet our year-end goal of 500,000 to 650,000."