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A Tough Call for AT&T Investors

Plans for Spinoffs, Tracking Stocks Raise Questions About Value


AT&T Corp. is testing the prowess, and the nerves, of investors from Main Street to Wall Street.

The telecommunications giant plans to break itself apart, again, with a plan that involves a complex program of issuing tracking stocks and spinning off divisions. As it stands now, the moves ultimately would create four separate stocks to represent AT&T's main businesses.

But the plan raises two basic and very prickly questions for investors, including the tens of thousands who own what is one of the most widely held stocks in the world. Will those four stocks be worth more than AT&T alone today, and which of those stocks might fare better than the others?

There are no easy answers, as investors illustrated Wednesday by again punishing AT&T's already ailing stock. Investors also were annoyed that AT&T posted lower third-quarter earnings Wednesday and predicted that its fourth-quarter profit would also trail expectations.

AT&T's stock tumbled $3.50 a share to close at $23.38, as 42 million shares changed hands in trading on the New York Stock Exchange. That means AT&T, a venerable component of the Dow Jones industrial average, has plunged 54% so far this year, wiping out $105 billion of stockholders' wealth.

This jaw-dropping decline put the pressure on AT&T and its chairman, C. Michael Armstrong, to abandon their grand plans for a telecommunications and cable-television empire and instead use the breakup to get AT&T's value rising.

AT&T has four main units: Its long-distance business, the nation's biggest with 60 million customers; its wireless group, with 12 million customers; its business services unit, which provides voice and data services to companies; and its broadband piece, which includes the nation's largest cable-TV operation that Armstrong assembled over the last two years with $100 billion in acquisitions.

When the dust settles two years from now, there would be four stocks:

* AT&T wireless. It already has a tracking stock that traces the division's performance, but the business would ultimately be spun off to AT&T shareholders in a tax-free exchange as a separate entity with its own stock. Thus, anyone buying AT&T stock now would get the chance to own AT&T Wireless too.

* The consumer long-distance and business services groups would become the "new" AT&T, represented by AT&T's existing stock. But the long-distance business would also get its own tracking stock.

* The broadband/cable group would eventually be spun off, but in the meantime it, too, would issue a tracking stock.

But confusion reigns about the breakup plan, the potential tax consequences for AT&T investors, the size of AT&T's future dividends and what all four pieces might be worth.

In fact, AT&T said the combined dividends of the four stocks probably "will be substantially less" than AT&T's current annual dividend of 88 cents a share, which with AT&T's low stock price amounts to a lofty 3.8% dividend yield.

"We would not be surprised ultimately to see AT&T eliminate its dividend altogether" after the breakup, said analyst Anna-Maria Kovacs of the investment firm Janney Montgomery Scott.

Even so, the analysts who follow AT&T daily are sharply divided about the breakup's prospects. For instance, the analyst at CIBC World Markets raised his rating on AT&T to a "buy" Wednesday, but Salomon Smith Barney's analyst cut the stock to "neutral."

In a stunning move, Kovacs issued a rare "sell" recommendation for AT&T--which calls for dumping what was once one of corporate America's blue-chip stocks.

Her call is "based on dismal results in [AT&T's] core long-distance operations in the third quarter, as well as on a reorganization plan that we believe will make it more difficult, rather than easier, for AT&T to recover," Kovacs wrote in her bulletin to clients.

Kovacs also fretted about AT&T's employees, saying that during the two years that the restructuring will occur, "morale, which is already low, can only plummet further."

Others were more sanguine. Douglas Christopher, an analyst for Crowell, Weedon & Co. in Los Angeles, said he's convinced the four stocks eventually will be worth more than AT&T alone today. "The company's [stock] price is extremely undervalued in my opinion, so it's a special situation or value play for patient investors, though I do emphasize patient," he said.

Jeffrey Pittsburg, president of the investment firm Pittsburg Institutional in Great Neck, N.Y., said he's urging clients to buy AT&T because it's now so cheaply priced, and the breakup should ultimately create a higher value.

"The parts [of AT&T] should be worth more than the whole, and if I'm an investor that's what I would do," he said.

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