RedHerring.com | AT&T's garage sale attracts buyers
AT&T's garage sale attracts buyers
By Stephen Lacey
Red Herring
March 2
Michael Armstrong is at it again. After spending
billions of dollars over the past two years to build a unified telephone/cable
conglomerate, AT&T (NYSE: T) is rapidly
rewriting those blueprints. While it's hard to criticize the motivation behind
recent asset sales -- debt reduction -- selling cable systems for less than was
originally paid for those properties is hardly an ideal way to create value for
shareholders.
Faced with the prospect of having its debt ratings lowered, thereby
restricting access to capital, it's evident that AT&T is under the gun to
pare a $64 billion debt load. So much so that the real winners may be smaller
cable companies like Mediacom Communications (Nasdaq: MCCC) and
Charter Communications (Nasdaq: CHTR), not
AT&T's shareholders.
On Tuesday, Mediacom agreed to purchase some of AT&T Broadband's
rural cable properties for $2.2 billion. In the cable industry, a widely used
yardstick for deal valuations is the amount per subscriber. The systems Mediacom
is buying have 840,000 subscribers, so the company is paying $2,619 per
subscriber. A day later, Charter solidified its grip on the St. Louis market by
acquiring 574,000 AT&T subscribers for about $3,000 to $3,100 each, in a transaction valued at $1.79 billion -- $1 billion in cash, $500
million in Charter stock, and cable properties in Miami valued at $249 million,
or about $4,016 per each of 62,000 subscribers.
How desperate is AT&T to reduce its debt burden? The properties
sold to Mediacom and Charter were part of those acquired in AT&T's 1999
purchases of TCI and MediaOne for $52 billion and $57 billion, respectively.
Those deals valued TCI and MediaOne at $3,200 and $4,500 per subscriber,
respectively. But these asset sales, in addition to several others this year,
should reduce AT&T's debt load to about $42 billion.
"While debt reduction is necessary for AT&T to retain its debt
ratings, obviously, these types of asset flips are not incremental to long-term
shareholder value," notes Jack Grubman, telecommunications analyst at Salomon
Smith Barney.
GARAGE SALE CONTINUES
In an effort to
keep the ratings agencies at bay, AT&T will continue selling assets. And
while it has apparently staved off further degradations in its ability to borrow
-- both Standard & Poor's and Moody's Investors Service downgraded
AT&T's senior debt ratings in November 2000 -- it's obvious that buyers are
taking advantage of the company. And as AT&T's negotiating leverage
diminishes, so does the attractiveness of its plan to split into four separate
publicly traded entities.
Negotiations between AT&T and AOL Time Warner (NYSE: AOL) for the FCC-mandated
sale of a 25.5 percent stake in Time Warner Entertainment remain at an impasse.
AOL reportedly has offered between $9 billion and $10 billion for the stake,
which analysts value at $13 billion. And while AT&T has threatened to
conduct an initial public offering of its interest in Time Warner, negative tax
implications associated with such a transaction leave AT&T little choice but
to accept the offer. AT&T has until March 15 to try and negotiate a
favorable agreement with AOL before it must proceed with the IPO
plans.
An unfavorable outcome could, in turn, affect how AT&T
structures the spin-off of AT&T Broadband, scheduled to go public this summer.
The division, considered the crown jewel of AT&T's remaining assets, serves
about 13.9 million cable subscribers and is valued at $32 billion to $33
billion, or $8 per AT&T share, according to Gary Jacobi, telecommunications
analyst at Deutsche Banc Alex. Brown. If AT&T sold a 15 percent stake in
AT&T Broadband, as was the case in the April 2000 AT&T Wireless (NYSE: AWE) IPO, the Broadband
offering would be worth $5 billion, from which the parent would net $1.6
billion. But if the Time Warner Entertainment sale doesn't fetch as much as
AT&T had initially hoped for, it's likely that AT&T Broadband would assume
an even larger chunk of AT&T's debt than originally planned.
AT&T has already shown a willingness to restructure its
spin-offs. On February 15, AT&T management stated that it plans to retain up
to $3 billion of AT&T Wireless stock for disposition after the distribution
to AT&T shareholders. That stake could be used for further debt repayment.
The spin-off of AT&T Wireless is targeted for completion by
April.
WHAT'S LEFT IN THE HOUSE?
While
these spin-offs are seen as crucial to AT&T's debt reduction goals, the
parent looks like it may fall short of levels needed by the ratings agencies.
Regardless of what assets are sold, it's hard to conceal the problems affecting
AT&T's consumer and business long distance businesses. "Sales don't mask a
lack of visibility on full-year results and continuing erosion of core business
and consumer long-distance operations that we believe remain troublesome in
valuing AT&T as an ongoing concern," says Mr. Grubman.
Indeed, based on AT&T's 69.9 percent stake in AT&T Wireless, which
now carries a market value of $52.8 billion, and the $32 billion value of its
broadband operations, the market currently assigns very little value to
AT&T's remaining consumer and long distance businesses. After seeing revenue
from consumer operations fall 14.7 percent in the fourth quarter, management has
already indicated that there would be a revenue decline in the "mid- to
high-teens" in 2001.
The outlook is similarly bearish for its business operations.
Revenue climbed 0.7 percent in 2000 and is expected to remain flat in 2001. As a
result of such operational shortfalls, it may be difficult for AT&T to meet
the debt reduction goals required by the ratings agencies.
While AT&T has offered no specifics on its debt reduction
targets, management told S&P that it wants to reduce its debt load to 1.5
times earnings before interest, taxes, depreciation, and amortization (EBITDA).
With Mr. Farber predicting that EBITDA will fall 19.3 percent to $18 billion
this year, AT&T would need to reduce debt to $27 billion, an additional $15
billion from current levels. But in order to get there, AT&T might have to
further dilute the value of the Broadband segment by forcing the spin-off to
take on a disproportionate level of debt.
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