AT&T considers four-way breakup Plan would create separate consumer, business, wireless and broadband operations through a complex series of spinoffs and tracking stocks. By Deborah Solomon and Nikhil Deogun, WSJ Interactive Edition October 23, 2000 5:20 AM PT http://www.zdnet.com/zdnn/stories/news/0,4586,2643398,00.html AT&T Corp. has created a plan to break the telecommunications giant into four stand-alone businesses, with its largest and most profitable unit, the Business Services division, becoming the new AT&T, according to people familiar with the situation. The plan, dubbed "Project Grand Slam," would create separate consumer, business, wireless and broadband operations through a complex series of spinoffs and tracking stocks. The end result could be a dramatic new business model for AT&T (NYSE: T), in which its business-services division -- which caters to corporate customers and includes the nation's largest data network -- would strike brand-licensing and commercial agreements with the three other businesses formerly part of AT&T. The business-services division generated $25 billion in 1999 sales, 39 percent of AT&T's total revenue, but contributed $9.2 billion, or 46 percent of AT&T's 1999 earnings before interest and taxes of $19.9 billion. AT&T's board is expected to discuss the proposal when it meets Monday. If such a plan is approved, an announcement could be made as soon as Wednesday, when AT&T is expected to report third-quarter earnings. It isn't clear whether the proposal will gain board support. People familiar with the situation said AT&T ultimately may not decide on a four-way separation, as there are many other options on the table. The board could choose to leave the entire business intact, or just spin off or issue a tracking stock of the company's consumer-long-distance business, whose revenue has declined with falling long-distance prices. A corporate icon A breakup of AT&T into four pieces would represent a stunning restructuring of a corporate icon. It also would amount to a sudden dismantling of an empire assembled by Chairman and Chief Executive C. Michael Armstrong, who spent more than $100 billion buying up cable companies after he took the helm of an ailing AT&T in 1997. Partly because of long-distance woes affecting the entire industry, AT&T's market valuation has plunged by more than $70 billion since January and the company has sought ways to boost its depressed stock price and sluggish revenue growth. Industry observers say much of AT&T's value isn't being realized because it is locked up inside the hodgepodge of businesses that it operates. Armstrong has noted that without the long-distance voice business, AT&T could grow 12 percent this year. In Friday 4 p.m. New York Stock Exchange composite trading, AT&T rose $2.19, or 8.8 percent, to $27, yet it was sharply off the 52-week high of $61. Under one scenario being discussed, the business-services unit could be spun off in a "reverse spin" transaction in which it kept the AT&T brand name and the coveted "T" ticker symbol on the New York Stock Exchange. This would allow the business-services division to grow on its own even as it strikes licensing agreements with the other units. The consumer long-distance division, for example, could license the AT&T brand name and strike an agreement to use AT&T's network to route telephone calls, said people familiar with the plan. Even though the business-services division would function as the new Ma Bell, AT&T would need to keep the cable business as the nominal and legal core, since a spinoff or sale of that business, which Armstrong built through mostly tax-free transactions, would have severe tax consequences. Those tax issues aren't a significant factor in separating the other units. Breakup idea not easy to swallow A full-blown breakup could be difficult for some board members to accept because it would reverse the company's three-year strategy of creating a full-service broadband behemoth. It also could pose financial challenges, especially since AT&T is saddled with $56 billion in debt and has been using the $8 billion in cash flow from long-distance business to pay for its cable investments. A scenario also being discussed would have AT&T's consumer business pay a dividend back to AT&T, which the parent company could use to pay down its debt. AT&T's management recently has been pushing for a spinoff or tracking stock of the consumer unit because the long-distance industry is declining much more rapidly than anybody had predicted due to increased competition and new technology such as the Internet and wireless. Slowing consumer-long distance has dragged down AT&T's overall growth rate to single digits. Separating the consumer long-distance unit could help improve the company's overall rate of growth. Executives at AT&T, including Armstrong, support a consumer spinoff, according to people close to the situation. The board may choose to separate just the consumer unit and leave the rest of the business untouched. Challenges for business services Meanwhile, even if it becomes a stand-alone operation, business services faces its own challenges. The unit, which has about six million business customers and the nation's largest data network, has been struggling this year. It has been plagued by the same falling long-distance prices as the consumer business and has experienced some customer defections. Armstrong was forced to scale back revenue-growth projections in the division to 6 percent from 11 percent earlier this year. He has acknowledged that half of his high-end accounts have experienced problems, which turned into "shortfalls" for AT&T, and has said the problems will take "quarters" to fix. But industry observers say making business services a stand-alone business could help the company more quickly fix the unit's problems and aggressively pursue the high-growth sales of data and Internet services to corporate customers. "There is not a single cable investor who owns AT&T stock and there's not a single wireless investor who owns AT&T stock," said Blake Bath, an analyst with Lehman Brothers Holdings Inc. By breaking up the company, he said, AT&T will be able to attract different types of investors to its four-core businesses. That will create a currency those businesses can then use for such things as acquisitions. Bath says a breakup proposal seemed to make sense for AT&T, which is competing with a host of smaller, more nimble rivals. "Once they spin off consumer-long distance and fully distribute wireless, what's left is just business services and the broadband business and there's just no reason for those two to stay together," he says. The separation of AT&T's wireless business is already under way. AT&T has long planned to either distribute or do an exchange offer for the remaining 85 percent of AT&T Wireless that it owns. AT&T Wireless Corp. trades as a tracking stock of AT&T and the parent company has said it plans to own none of AT&T Wireless by the end of 2001. AT&T Broadband Services, currently run out of Denver, would end up operating as a separate business under the plan. The business, which consists of AT&T's vast cable-TV investments and its cable-telephony offering, also could strike licensing agreements with business services for the AT&T brand name and other services. Again, for tax-related reasons, this unit legally would be the old AT&T. AT&T Corp. has created a plan to break the telecommunications giant into four stand-alone businesses, with its largest and most profitable unit, the Business Services division, becoming the new AT&T, according to people familiar with the situation. The plan, dubbed "Project Grand Slam," would create separate consumer, business, wireless and broadband operations through a complex series of spinoffs and tracking stocks. The end result could be a dramatic new business model for AT&T (NYSE: T), in which its business-services division -- which caters to corporate customers and includes the nation's largest data network -- would strike brand-licensing and commercial agreements with the three other businesses formerly part of AT&T. The business-services division generated $25 billion in 1999 sales, 39 percent of AT&T's total revenue, but contributed $9.2 billion, or 46 percent of AT&T's 1999 earnings before interest and taxes of $19.9 billion. AT&T's board is expected to discuss the proposal when it meets Monday. If such a plan is approved, an announcement could be made as soon as Wednesday, when AT&T is expected to report third-quarter earnings. It isn't clear whether the proposal will gain board support. People familiar with the situation said AT&T ultimately may not decide on a four-way separation, as there are many other options on the table. The board could choose to leave the entire business intact, or just spin off or issue a tracking stock of the company's consumer-long-distance business, whose revenue has declined with falling long-distance prices. A corporate icon A breakup of AT&T into four pieces would represent a stunning restructuring of a corporate icon. It also would amount to a sudden dismantling of an empire assembled by Chairman and Chief Executive C. Michael Armstrong, who spent more than $100 billion buying up cable companies after he took the helm of an ailing AT&T in 1997. Partly because of long-distance woes affecting the entire industry, AT&T's market valuation has plunged by more than $70 billion since January and the company has sought ways to boost its depressed stock price and sluggish revenue growth. Industry observers say much of AT&T's value isn't being realized because it is locked up inside the hodgepodge of businesses that it operates. Armstrong has noted that without the long-distance voice business, AT&T could grow 12 percent this year. In Friday 4 p.m. New York Stock Exchange composite trading, AT&T rose $2.19, or 8.8 percent, to $27, yet it was sharply off the 52-week high of $61. Under one scenario being discussed, the business-services unit could be spun off in a "reverse spin" transaction in which it kept the AT&T brand name and the coveted "T" ticker symbol on the New York Stock Exchange. This would allow the business-services division to grow on its own even as it strikes licensing agreements with the other units. The consumer long-distance division, for example, could license the AT&T brand name and strike an agreement to use AT&T's network to route telephone calls, said people familiar with the plan. Even though the business-services division would function as the new Ma Bell, AT&T would need to keep the cable business as the nominal and legal core, since a spinoff or sale of that business, which Armstrong built through mostly tax-free transactions, would have severe tax consequences. Those tax issues aren't a significant factor in separating the other units. Breakup idea not easy to swallow A full-blown breakup could be difficult for some board members to accept because it would reverse the company's three-year strategy of creating a full-service broadband behemoth. It also could pose financial challenges, especially since AT&T is saddled with $56 billion in debt and has been using the $8 billion in cash flow from long-distance business to pay for its cable investments. A scenario also being discussed would have AT&T's consumer business pay a dividend back to AT&T, which the parent company could use to pay down its debt. AT&T's management recently has been pushing for a spinoff or tracking stock of the consumer unit because the long-distance industry is declining much more rapidly than anybody had predicted due to increased competition and new technology such as the Internet and wireless. Slowing consumer-long distance has dragged down AT&T's overall growth rate to single digits. Separating the consumer long-distance unit could help improve the company's overall rate of growth. Executives at AT&T, including Armstrong, support a consumer spinoff, according to people close to the situation. The board may choose to separate just the consumer unit and leave the rest of the business untouched. Challenges for business services Meanwhile, even if it becomes a stand-alone operation, business services faces its own challenges. The unit, which has about six million business customers and the nation's largest data network, has been struggling this year. It has been plagued by the same falling long-distance prices as the consumer business and has experienced some customer defections. Armstrong was forced to scale back revenue-growth projections in the division to 6 percent from 11 percent earlier this year. He has acknowledged that half of his high-end accounts have experienced problems, which turned into "shortfalls" for AT&T, and has said the problems will take "quarters" to fix. But industry observers say making business services a stand-alone business could help the company more quickly fix the unit's problems and aggressively pursue the high-growth sales of data and Internet services to corporate customers. "There is not a single cable investor who owns AT&T stock and there's not a single wireless investor who owns AT&T stock," said Blake Bath, an analyst with Lehman Brothers Holdings Inc. By breaking up the company, he said, AT&T will be able to attract different types of investors to its four-core businesses. That will create a currency those businesses can then use for such things as acquisitions. Bath says a breakup proposal seemed to make sense for AT&T, which is competing with a host of smaller, more nimble rivals. "Once they spin off consumer-long distance and fully distribute wireless, what's left is just business services and the broadband business and there's just no reason for those two to stay together," he says. The separation of AT&T's wireless business is already under way. AT&T has long planned to either distribute or do an exchange offer for the remaining 85 percent of AT&T Wireless that it owns. AT&T Wireless Corp. trades as a tracking stock of AT&T and the parent company has said it plans to own none of AT&T Wireless by the end of 2001. AT&T Broadband Services, currently run out of Denver, would end up operating as a separate business under the plan. The business, which consists of AT&T's vast cable-TV investments and its cable-telephony offering, also could strike licensing agreements with business services for the AT&T brand name and other services. Again, for tax-related reasons, this unit legally would be the old AT&T. --- You are currently subscribed to members as: [email protected] To unsubscribe send a blank email to [EMAIL PROTECTED]
