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AT&T eager to exchange control for capital

In the midst of a four-part restructuring plan, the company is eager to give up equity in itself--and its subsidiaries--or sell its assets or investments in exchange for much-needed capital.

In these lean times, Ma Bell appears willing to sell a piece of its soul.

AT&T, in the midst of a four-part restructuring plan, is eager to give up equity in the company--and its subsidiaries--or sell its assets or investments in exchange for much-needed capital.

The money, AT&T hopes, will pay down the company's large debt, fund its network upgrades, help it revise its business plan, and renew investor confidence. But by selling a portion of the company and its various units and thereby turning over some of its autonomy, Ma Bell is opening itself to greater control by outside investors.

"This is obviously a move to raise capital," said Lisa Pierce, a vice president and telecommunications research leader at Giga Information Group, a market research firm. AT&T chief executive C. Michael Armstrong is "in quite a bind," she said. "It's a shame."

AT&T sold a $6.2 billion stake in its AT&T Wireless unit to NTT DoCoMo, a Japanese wireless carrier. DoCoMo also gained a $3.6 billion stake in the AT&T parent company. The massive stakes come 19 months after AT&T sold a $5 billion stake to software giant Microsoft.

Over the next two years, AT&T plans to sell shares in standalone spinoffs or tracking stocks for AT&T Consumer, AT&T Broadband and AT&T Wireless, three of the company's units.

In addition to shares in itself, AT&T may be considering sales of certain investments as a way to generate capital.

Ma Bell might sell its 10 percent stake in Japan Telecom to British Telecommunications, according to Bloomberg News. However, a proposed sale is likely to be tied to DoCoMo's new stake in AT&T because of its competition with Japan Telecom. And some analysts wonder whether AT&T might not have sold the stake anyway, because of poorer-than-expected returns.

Weighing its options
The debt AT&T took on to help it create a standalone, integrated communications powerhouse is coming due at the same time its profits are slipping and the capital investment markets have dried up, leaving the company with fewer choices for raising capital.


Gartner analyst Jay Pultz says now that AT&T has determined to split itself into four parts, the question becomes, what will happen to those parts?

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"No company likes to have a big debt burden hanging over them," said Elliott Hamilton, a communications industry analyst and senior vice president at The Strategis Group.

"The completely rational long-term strategy probably wouldn't have them doing a lot of these deals," Hamilton said. "But they have to react to what the market is telling them."

Two other recent moves were inspired by regulatory scrutiny but will nevertheless serve to generate much-needed capital.

AT&T spun off Liberty Media, its cable TV programming business, last month, and AT&T is aiming to sell some rural cable systems serving about 1.2 million customers in Montana and Iowa, according to media reports. Both moves are related to the company's acquisition of MediaOne Group, which put AT&T over the federal government's cable ownership cap.

Analysts say the deals, collectively, are a sign that AT&T is willing to make tough decisions to pay off its huge debt.

"They may not be things that they'd like to do, but they have to somehow get out from under this rock," Pierce said. "I don't think there's any choice. This is what they have to do."

The debt's depths
AT&T's debt at the end of September was nearly $62 billion, an increase from the $36 billion the company had on the books at the end of 1999, primarily because of the MediaOne acquisition.

According to AT&T's filings with the Securities and Exchange Commission, interest expenses increased $1.2 billion in 1999 because of a higher average debt balance associated with its acquisitions. In addition, AT&T said it intended to repay much of its debt this year with other short-term borrowings because its cash generated from operations would be used to pay for dividends and capital expenditures.

AT&T had just $7 billion in debt in 1998, Pierce said.

The company's depressed stock price makes a stake in AT&T more attractive for some companies, such as DoCoMo, analysts said.

"By virtually any metric imaginable, AT&T's stock price is cheap," said a recent report by Goldman Sachs. But Ma Bell is handing over a significant stake in its ventures for far less cash than executives might have hoped for.

Although analysts question the rationale behind AT&T's sales and spinoffs, some suggest that taken individually, some of the deals are wise.

"Some of them are good, though, and I think they'll gain a lot of knowledge and expertise from the DoCoMo deal in the wireless Internet space," Hamilton said. "Obviously there will be other board members that they'll have to report to now, but that shouldn't deter them from doing deals."

Some analysts believe AT&T's historically isolationist strategy is coming back to bite the company in an era of mutually beneficial partnerships between competitors--sometimes called "coopetition."

"They wanted to buy up the cable operators rather than just doing a deal," Hamilton said. "For too long AT&T always tried to go it alone."