Article on AT&T Board retreat:
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AT&T: Let's Make a
Deal
AT&T's board of directors and
executives are meeting at their annual retreat this week, and
are reportedly discussing a wide variety of strategic options.
Investors should consider whether any announcement that
results from the meeting will help the company with its
principle challenge: increasing the return on its huge capital
investments.
By Chris Rugaber (TMF RFK)
September 20, 2000
Shareholders in leading telecom and cable provider AT&T
(NYSE: T) should prepare themselves, if they haven't
already, for the onslaught of news, analysis, and rumors
almost certain to emanate from the company's annual
retreat, which begins tomorrow. Indeed, the speculation
and gossip about what will transpire behind closed doors
began days ago.
Regardless of the outcome, a key question for investors to
consider while perusing news of any deals or restructurings
is whether or how they will affect the company's declining
returns on invested capital.
So many choices...
AT&T's board will apparently consider numerous options to
pump some life into the company, and more specifically, the
stock. One of the most frequently mentioned possibilities is
an alliance or combination of some kind with British
Telecom (NYSE: BTY), which is also undergoing a painful
transition as increased telco competition in the U.K. eats
away at its former monopoly. The two companies could
expand their current partnership for international business,
known as Concert, or perhaps combine their wireless assets.
Even a full merger has been rumored, though that seems
unlikely. On Sunday, BT did confirm that the two companies
were engaged in talks, though AT&T declined to comment.
Another option, widely reported last week, would be a
combination of AT&T Wireless (NYSE: AWE) with Nextel
(Nasdaq: NXTL). Finally, two different options may be
discussed for the company's huge, profitable, but stagnant
consumer long-distance division. One possible move would
be to spin off the business into a publicly traded entity that
would be controlled by a consortium of cable companies and
AT&T. A second option would involve combining long
distance with Liberty Media Group (NYSE: LMG.A), AT&T's
cable programming division headed by board member John
Malone.
It's not clear which of these maneuvers, if any, will do much
for the stock price in the short term. Many of these
possibilities have been floated for some time, and yet the
only recent upswing in the share price resulted from a false
rumor last week that CEO Michael Armstrong would be fired
and replaced by Malone. According to a Goldman Sachs
analyst, AT&T won't make any major strategic
announcements until mid-October, so shareholders may
have to be patient.
Capital spending: No way out?
As Fool news writer Richard McCaffrey has written, AT&T's
decline in its return on invested capital -- which fell from
21% in 1998 to 8% last year -- is one of its biggest
problems, thanks in part to the huge capital expenditures
(or "cap ex") it has made to purchase and upgrade its cable
plant.
Certainly, the company is not alone. On an industry-wide
basis, a recent Lehman Brothers report noted that the ratio
of revenue to capital spending for the telecom carriers has
declined dramatically in recent years, as revenues have not
kept up with cap ex. This probably explains much of the
carriers' recent poor performance in the markets.
AT&T is an excellent example of this trend. Its ratio of
revenue to capital expenditures decreased from 10.4 to 1 in
1995 to only 4.6 to 1 last year, as revenues clocked in at
$62.6 billion, and capital expenditures at $13.5 billion. In the
end, billions in revenue and profits are fine, but the market
isn't as impressed if you have to spend a tremendous
amount to get there.
It's unclear whether any of the possible deals being
discussed could improve this dynamic. An alliance with BT
might provide some economies of scale. In addition,
according to a report in The Wall Street Journal earlier this
week, AT&T hopes that selling its long-distance business to
a cable consortium would speed up deployment of cable
telephony and other services, boosting returns from its
cable investments.
What's next for shareholders?
For what it's worth, many of these concerns and the
uncertainty surrounding the company seem to be largely
priced into the stock, which is down almost 40% for the
year. In fact, Lehman estimates that, excluding the wireless
business, the company's enterprise value (EV) is only two to
three times next year's EBITDA (earnings before interest,
taxes, depreciation, and amortization). It may be an
investing cliche -- and it may be wrong -- but it seems
unlikely the shares can go much lower than that.
Your Turn:
What do you think would be the company's best moves? Let
us know on the AT&T discussion board. |
