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AT&T's hang-ups
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December 20, 2001: 6:00 p.m. ET
After the Comcast deal, what's left for the widows and orphans?
By Paul R. La Monica
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NEW YORK (CNN/Money) - Finally.
After five months of deliberations, AT&T has at long last decided to sell its AT&T Broadband cable business to Comcast, spurning rival bids from AOL Time Warner and Cox as well as scuttling a plan to go it alone and spin off the stock.
So what does this sale mean for the long-suffering investors of Ma Bell, one of the most widely-held stocks in the world?
Better deal than the original offer
Comcast agreed to pay $47 billion in stock for AT&T Broadband and assume $25 billion in debt. This deal is far more attractive than Comcast's original unsolicited offer in July. At the time, Comcast offered $44.5 billion in stock and was willing to assume only $13.5 billion in debt.
Based on Wednesday's closing price for Comcast (CMCSK: down $0.84 to $34.95, Research, Estimates), the transaction values AT&T Broadband at $13.07 a share. AT&T will effectively spin off the broadband unit and merge it immediately thereafter to create AT&T Comcast. Existing AT&T shareholders will receive 0.34 share of Comcast and get to hold onto their AT&T shares, reflecting what's left of the company.
With AT&T stock just shy of $18, the market is valuing what will be left of AT&T at a little less than $5 a share. That potentially makes the T shares a value lover's delight. (And my colleague from MONEY magazine, Pablo Galarza, makes exactly that case -- click here for the full story.)
But with the spin-off of AT&T Wireless complete and the sale of AT&T Broadband slated to close in 2002, the only two remaining businesses left for shareholders of AT&T will be two snoozers: Business services and consumer services (your basic run-of-the-mill long-distance).
What's left is struggling
It's no secret that phone-service is a business in a serious decline. Jeff Kagan, an independent telecom analyst based in Atlanta, thinks that the business-services unit will bounce back as corporate customers, dissatisfied with the services of upstart competitive local exchange carriers (CLECs), return to companies like AT&T.
So far, however, there is no evidence of a turnaround. Third-quarter revenue from AT&T Business decreased 4.7 percent from a year ago and revenues for the unit are down 2.5 percent through the first three quarters of the year.
The rest of AT&T is in even worse shape. The increased use of cell phones and the Internet, in addition to nascent competition from regional Baby Bell carriers, has put a severe dent in its consumer business.
Revenues in the third quarter declined 17.8 percent and are down 20.7 percent for the first nine months of 2001. What's more, EBITDA (earnings before interest, taxes, depreciation, and amortization) plunged 28 percent in the third quarter and have fallen 26.5 percent for the first three quarters of the year. EBITDA is a commonly used yardstick for profitability in the telecom and media sectors due to the asset intensive nature of the business.
Kagan says for the consumer business to get back on track, AT&T is going to need to successfully get customers to buy more than just traditional voice services. To that end, AT&T acquired some of the assets of bankrupt digital subscriber line company (DSL) NorthPoint Communications earlier this year.
But wasn't the whole point of AT&T's cable gambit to be able to package services like telephony, cable and high-speed Internet access to its millions of subscribers? That's no longer an option. Plus, AT&T will face stiff competition from the Baby Bells, which have been offering DSL for some time.
What About Cable?
But, of course, existing AT&T shareholders also will be getting shares in AT&T Comcast once the merger closes sometime in 2002. The company will have approximately 22 million cable subscribers, giving it a sizable lead over number two cable operator AOL Time Warner (the owner of CNN/Money). AT&T chairman and CEO C. Michael Armstrong will be chairman of AT&T Comcast but Comcast president Brian Roberts will be CEO.
Here, growth prospects are much brighter. Comcast, prior to the AT&T deal, was expected to post annual EBITDA gains of 12 percent over the next three to five years.
Still, at 10.4 times estimated 2002 EBITDA, Comcast trades at a premium to rivals Charter, Mediacom and Adelphia Communications. What's more, the addition of a large amount of debt to Comcast's balance sheet could prove problematic. Comcast had to take on a significant amount of debt in order to get the deal to work. Armstrong certainly knows what that feels like -- and it doesn't feel good.
After all, AT&T sold off several cable assets for valuations far less than what it originally paid for them in order to pare down the mammoth debt load it incurred while amassing its cable empire. AT&T spent more than $100 billion, or about $4,100 per subscriber, with the purchases of TCI and Media One in 1999. But in February, AT&T sold systems with 840,000 rural subscribers to Mediacom for $2.2 billion, or just over $2,600 per subscriber. Also in February, AT&T sold systems in St. Louis with 570,000 subscribers to Charter Communications for $1.8 billion, or a little more than $3,100 per subscriber.
Jeff Van Harte, manager of the Transamerica Premier Equity Fund, says AT&T Comcast could wind up selling a couple million subscribers if need be in order to further reduce debt.
Still, investors must be hoping that the grand plan Armstrong had for AT&T will finally work with the help of Comcast. Bundling cable and telephony in one package is a strategy that may eventually pan out. But if it does, it probably will be many years (if ever) before AT&T shareholders see the benefits of Ma Bell's cable maneuverings. Although shares of AT&T are up nearly 40 percent this year, the stock is still trading 70 percent below its all time high, set in 1999.
"At the end of the day, Armstrong had the right vision. He just overpaid for it," says Van Harte. It remains to be seen whether or not the same can be said about Comcast two years from now. 
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