The Starting Line: AT&T talks up cable

Ma Bell emphasizes the strength of its cable business in an effort to fetch a higher price from Comcast or another suitor.

4 min read
AT&T executives are going to great lengths to shine the spotlight on its cable unit--the best horse in a weak stable--in an effort to find a white knight to trump Comcast Communications' recent bid.

Ma Bell is spending a lot of time talking up AT&T Broadband largely because it is the company's only bright spot. The company posted a passel of bad figures in its second-quarter report earlier this week. Two of three business units saw year-over-year revenue declines, including a 20 percent drop in consumer long-distance.

Executives predicted third-quarter profits would be at least a penny below the then-consensus estimate of 6 cents per share. The company expects third-quarter revenue will slide further from second-quarter levels. And things could get even worse if the economy stays weak.

"AT&T is clearly not out of the woods with regards to the erosion of core products," Prudential Securities analyst Floyd S. Greenwood wrote Tuesday.

But one division--AT&T Broadband--shone, and company executives went so far as to have a separate conference call on Tuesday devoted solely to that unit.

That's what happens when someone is trying to buy a unit for less than the parent wants, which is what Comcast is doing. Ma Bell succeeded in justifying a higher price for AT&T Broadband, which oversees AT&T's cable business, analysts said.

Indeed, AT&T is reportedly shopping around its cable unit to AOL Time Warner among others partially to get Comcast to raise its bid, according to a published report in The Wall Street Journal.

"If AT&T has accomplished nothing else, they've probably accomplished squashing Comcast's bid," said Bruce Roberts, senior analyst with Dresdner Kleinwort Wasserstein.

Last week AT&T said Comcast's offer to buy AT&T Broadband in a deal initially valued at $41 billion wasn't high enough.

Close-up on cable
"Having been shut down due to all these proxy filings, exchange offerings and spinning off companies, we really haven't shared with our shareholders what we're doing to make this business more valuable," said AT&T CEO C. Michael Armstrong.

"And then along came this two-page letter (from Comcast) that really put the spotlight on us...It was just sound shareholder relations to let people know what we're doing and what we've done and where we're going with it. It's nothing more complicated than that," he said.

The issues were sufficiently complicated for Tuesday's call to last almost two hours, despite rigidly enforced limits on the number of questions each analyst could ask. But while discussions bounced from network upgrades to Internet telephony to digital TV to high-speed Internet access to competition from other companies, AT&T executives kept returning to the same theme: The cable business is quickly improving profit margins even as it grows rapidly.

Armstrong and his team pointed to AT&T Broadband's better-than-expected second-quarter performance as proof that the cable business is getting better.

Second-quarter revenue for the unit increased 13.7 percent to $2.6 billion year over year. The division's cash-flow margin rose to 23.4 percent in the second quarter, compared with 18.3 percent in the first quarter. Executives expect the cable unit to hit the industry standard of about 40 percent by 2003.

Analyst David Burks saw no reason to doubt them.

"So far, it looks like they're right," said Burks, of J.J.B. Hilliard, W.L. Lyons. "Clearly, broadband is the best horse in their stable."

Turning "a bicycle into a Mercedes"
Dresdner Kleinwort's Roberts believes AT&T Broadband could be worth as much as $75 billion, based on earnings and revenue growth projections using second-quarter results, rather than the first-quarter numbers that Comcast relied on.

More than 70 percent of AT&T's network was upgraded for advanced services by the end of the second quarter, executives said. At the same time, expenses have fallen as the company has cut jobs, streamlined its agglomeration of call centers and cable networks, and focused on large metropolitan markets that allow for greater efficiencies of scale.

Although cable generated less than a fifth of AT&T's overall revenue, the business' growth opportunity makes AT&T shares worth more than Tuesday's closing stock price of $19.46, several analysts said.

"Broadband...turned a key corner and accounts for a substantial portion of our sum of the parts valuation," said Linda Meltzer, analyst with UBS Warburg.

At this point, investors shouldn't mind that AT&T has taken years to get to this point with its cable business, Roberts said. The TCI network purchased by AT&T was larger and more primitive than networks of other large cable companies. "They were trying to turn a bicycle into a Mercedes," Roberts said. "It's not an easy thing to do."