AT&T to split into 4 core units

amount to a complete reversal of chairman and chief executive C Michael Armstrong’s strategy. He has spent the past few years – and more than $100 billion in stock – acquiring cable and wireless companies and hoped to create a broadband behemoth that could deliver voice, video and data services.

But Armstrong was outrun by steep price competition in the long-distance industry and unable to expand the new businesses fast enough to make up the difference. AT&T has come under fire in recent months for its sluggish revenue growth and has dropped about $70 billion in market valuation since January. The rapidly declining price of long-distance service has affected both its consumer and business-services divisions, and Armstrong increasingly couldn’t convince Wall Street to give the new businesses the valuations he thought they deserved.

The purpose of breaking up the company and creating the spinoffs and tracking stocks is to attract new investors into the disparate parts of AT&T’s business. The company is generally valued as a long-distance stock even though it has significant cable and wireless assets. New investors also would help AT&T raise cash, which the company could then use to pay down its huge debt. It will also give the individual companies more flexibility for acquisitions.

Armstrong is expected to head up the parent company, which includes business services and consumer long distance. However, the consumer long-distance business with its tracking stock will likely have its own CEO. The plan calls for creating a tracking stock for the consumer business in order to raise cash and give investors a choice between owning the long-distance business or business services.

While in decline, consumer long distance has $8 billion in annual cash flow and could pay a higher dividend than business services. Together, the two businesses include six million business customers and about 60 million long-distance customers. Together, business services and consumer long distance make up the biggest chunk of AT&T’s profit and revenue: about $46 billion in revenue and $18 billion in profit before interest and taxes.

But both businesses are also weakened. Some analysts are expecting double-digit declines in the consumer long-distance business for the third quarter when AT&T reports its earnings Wednesday and AT&T also lowered its annual growth forecast for business services earlier this year. Wireless growth is expected to be strong.

Some industry observers question whether the breakup is the right move for AT&T, saying the company has execution problems that can’t be solved with tracking stocks and spinoffs. "The reason the stock is at $27 is because what AT&T promised the street they didn’t deliver on in business services and cable," said Jack Grubman, an analyst with Salomon Smith Barney. Grubman said AT&T is "losing sight of the fact that it takes time and a lot of operational muscle to drive an integrated company."

While the move to create a tracking stock for consumer long distance might not be as clean a break as investors had hoped, it will help Wall Street value the long-distance business. It also will keep togeter two businesses that are natural partners. Both the consumer and business units share the AT&T network, which helps the company offset costs. AT&T’s network is used primarily by business customers during the day and consumers at night, which makes operation of the network more economical.

While AT&T had considered a complete spinoff of the consumer business, people close to the situation said that the board instead favored a tracking stock, in part because it is quicker to get done and it also avoids complications regarding network-sharing issues and regulatory challenges. A tracking stock tracks the performance of a specific division but doesn’t create a separate corporate entity.

But perhaps the most significant move is the company’s plan to separate AT&T’s traditional telephone business from its newly acquired cable operations. For tax reasons, AT&T can’t spin off its cable business — known as AT&T Broadband Services — for two years. So, the company plans to spin off its business-services and consumer-long-distance business together — everything but cable. This would essentially be a "reverse spin" of the cable business, in which the AT&T brand name and the coveted T ticker symbol on the New York Stock Exchange would remain with the phone businesses.

The cable business will eventually be a separate, publicly traded entity. Since it can’t be spun off for nearly two years, the company may issue a tracking stock in the meantime. However, AT&T can take public a minority interest in the cable business via an initial public offering and spin off the rest in two years. An IPO in the cable business is expected in the summer of 2001, said people familiar with the situation.

Furthermore, AT&T plans to spin off to shareholders its 85% ownership in AT&T Wireless Corp., which currently trades as a tracking stock and is controlled by AT&T. Under the new plan, AT&T could spin off the remaining 85% of AT&T Wireless in a couple of ways — either as a dividend to shareholders or an exchange offer that would allow AT&T shareholders to swap some of their shares in AT&T for shares in the wireless entity. That would form a separate entity and a stock with full voting rights, said people familiar with the situation. AT&T has previously stated that it plans to own none of AT&T Wireless by the end of next year.