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AT&T, others use spinoffs to cover weak business tracks

Communications companies are beginning to consider tracking stocks and spinoffs as ways to isolate slow-growth segments, carving out cancerous corporate units that eat away at profits.

Spinoffs and tracking stocks for slower-growth communications units are coming into vogue, but some analysts question how helpful they can be.

Telecommunications carriers for a while now have been trying to boost the value of their crown jewel wireless and data networking units by spinning them off as separately valued stocks. Sprint, for example, spun off its lucrative wireless unit as Sprint PCS, and AT&T recently created a tracking stock for its wireless services.

These explosive new businesses generally are mixed in with older telecommunications assets, such as long-distance phone service. Executives believe their newer services such as wireless go unheralded, and undervalued, as long as they are hidden away from investors.

But now, companies also are beginning to consider tracking stocks and spinoffs as ways to isolate slow-growth segments, effectively carving out cancerous corporate units that eat away at profits and investor confidence.

Tracking stocks are shares assigned to a particular business unit of a company. Sometimes referred to as "designer" or "alphabet" stocks, trackers are intended to draw attention to, and place a value on, certain corporate segments. Typically tracking stocks are used to unlock a particularly strong business division whose value may not be reflected in the broader company's stock price. High-growth wireless and Internet units have been common candidates for tracking stocks in recent years.

For example, AT&T and WorldCom are rumored to be considering spinoffs of their consumer long-distance businesses, as newer companies continue to eat away at their market share and profits by entering into price wars.

Similarly, telecom equipment provider Lucent Technologies recently spun off much of its older technologies as part of a venture dubbed Avaya.

Saddled with Lucent's slower-growth corporate phone gear business, Avaya shares quickly fell below their opening price.

"(Trackers) help at least jettison the slower-growth business for the parent, but I don't know how much they do for the spun off entity," said Donna Jaegers, assistant portfolio manager for the Invesco Telecom Sector Fund. "I don't know how much I'd want to be an Avaya employee and watch my stock price go from $21 to $14."

Some analysts say that, good or bad, tracking stocks and spinoffs help provide financial clarity for increasingly complex companies, which may be in dozens of different businesses.

"The trend toward trackers and spinoffs is a sound one. It gives a clearer picture of what all the subparts are," said Ed Keon, director of quantitative research at Prudential Securities. "They're trying to assess what's really valued and what isn't. There's no better guide to strategy than to find out what parts are worth."

AT&T recently issued a tracker for its lucrative wireless unit. The $11.5 billion offering, which trades under the "AWE" ticker symbol, was the largest ever IPO by a U.S.-based company.

Similarly, Sprint PCS, the tracking stock for Sprint's wireless unit, has a market value far greater than its parent company. And before merging with Bell Atlantic to create Verizon Communications, GTE spun off its Internet business, forming Genuity, a $5 billion standalone company, although the spinoff was required by regulators as part of the merger.

Lucent has taken both approaches with its spinoffs. Lucent Microelectronics, which makes communications chips, is preparing to separate itself from its parent by early next year. The plan calls for unlocking the value of a high-growth business that is hidden by the rest of the mammoth company, while the Avaya unit was a slower-growth corporate networking business.

"Part of (the Avaya spinoff) was an issue around focus, focusing on some very specific markets," said Lucent spokeswoman Mary Ward. "The markets and customers were different. By creating a separate business it gives them the advantage of a focused management team while the rest of Lucent focuses on the markets it's targeting such as optical, wireless and software for carriers.

"The goal was to get us focused and to establish two strong separate companies," Ward said.

But Invesco's Jaegers added: "What's the appeal of a tracker in a low-growth cash flow business unless you get a dividend? We'd certainly not be big buyers of those entities."