In my vision @home is the premier provider of the primary source of communication, information and entertainment in the entire world. Thinking big enough for ya?
You are not alone, nor in need of medication for your vision but the persona of @home is not yet self actualized.
What amazes me most, in spite of all the fumbling and bumbling -who can rival them?
In my crazy dream I fantasized that the last year or so was one huge subterfuge to draw suspicion from the master plan behind all the dealings so it can all come together as you envision. At this point, I have the fantasy under control and see it as just that, a fanciful daydream. Your visionary statement expresses where much of the angst we all feel toward the sorry state of our perceived status and current station comes from. Are we chasing Windmills?
'Much of sanity
may be madness
but the maddest of all-
to see things as they are
and not as they could be.'
Cervantes
'And a light shown in the darkness, but the darkness comprehended it not...'
The Good Book
news.morningstar.com
What to Do with AT&T
by Michael Hodel | 08-18-2000 | E-mail Article to a Friend
Everybody hates AT&T T right now. Growth is pathetic, the wireless tracking stock and thoughts of other such gimmickry backfired, and business customers are switching to rival carriers. The only tech fund manager who appears to like the company, Kevin Landis of Firsthand Technology Value TVFQX, is considered by many of his peers to be wrong.
But is he? Is there a solution that would reward despairing shareholders who have seen the stock cut in half in a matter of months? Given that AT&T's components are worth more than the company's current market capitalization, the answer is certainly yes.
For AT&T to unlock the value of its assets, it needs to think beyond tracking stocks or random spin-offs of businesses, since the market doesn't seem to like them at the moment. The company could begin by taking advantage of the high values placed on wireless assets.
Right now, the price of AT&T Wireless AWE tracking stock implies a value of only about $5,000 per subscriber, far below the valuations of independent rivals. One of the main reasons for this is the unlikelihood that AT&T Wireless, in its current form, will ever be acquired. AWE is merely another class of AT&T stock, so a suitor would have to go thorough the parent first. It appears that Mr. Market is severely punishing AT&T for this captivity.
Some brief mathematical gymnastics should drive home why CEO Michael Armstrong should spin off the wireless business as a completely separate, publicly held company. Using a typical value per subscriber of around $8,000, AT&T's wireless business would be worth about $95 billion, a full $35 billion more than its current valuation. Considering that AT&T Wireless has the second-highest average monthly revenue per user in the industry, it would likely be instantly targeted by a deep-pocketed suitor.
Sure, AT&T's wireless networks use older technology, but that doesn't warrant the discount placed on these assets, which is more than made up for by the company's marketing prowess and huge coverage area. Making the wireless unit available to the public could hinder AT&T's ability to offer its customers bundled services, but the two units could agree to maintain their relationship. The opportunity to realize the high values currently placed on wireless assets, from the shareholders' perspective, at least, is too great to pass up.
Then there is the business division, plagued by salesforce troubles that have dropped revenue growth far below previous expectations. This unit will still generate around $10 billion this year in cash flow, and such a huge customer base could be worth a pretty penny to a better-managed telecom carrier with more up-to-date data networks. In the hands of a next-generation carrier like Global Crossing GBLX, AT&T's customer base could generate boatloads of profits, and could conservatively fetch $50 billion. The unit's value in a deal like this is hard to determine, though, because difficulties would undoubtedly arise in transferring customers and the buyer probably wouldn't be interested in AT&T's network.
This leaves the cable and consumer businesses. The cable infrastructure is primarily a residential asset, and leveraging AT&T's consumer-marketing savvy and large long-distance customer base will drive demand. Joining these two businesses in a consumer juggernaut and adding the company's stakes in other consumer-oriented businesses like Excite@Home ATHM and Net2Phone NTOP makes perfect sense for AT&T's long-term success.
AT&T has gotten little credit for how admirably it has managed its declining consumer long-distance revenue. Profits from the consumer division actually grew slightly last quarter. For now, at least, this business is generating the cash flow needed to upgrade the cable plant and keep operations running smoothly.
Over time, the value of the long-distance business will decline. But as cable telephony gets off the ground, AT&T will have the opportunity to offer local phone service to much of its long-distance customer base, cementing loyalty among these users. High-speed Internet access and new services like video on demand will begin to replace and probably eventually surpass long-distance spending in consumers' communication budgets. AT&T's position in the consumer market would gain a sustainability more easily recognized by the market.
Repositioning AT&T's wireless and business-customer assets could generate around $120 billion--close to the $150 billion contained in the company's existing market capitalization and long-term debt. This would satisfy shareholders' frustration with the current share price, and AT&T would be left with a highly focused, well-positioned consumer business that is easily evaluated by investors.
Of course, the probability that AT&T will make a bold move like this is unknown. The risk that AT&T will attempt to prove its current strategy sound, leaving its unimpressive growth rates foremost in investors' minds, is substantial. What is clear is that AT&T is worth far more than its current market value would indicate. When shareholders will realize this value, given Armstrong's penchant for tracking stocks and empire building, is hard to say.
What do you think? Feel free to agree or disagree, or just join the Conversation.
Michael Hodel is an analyst with Morningstar.com. He can be reached at michael_hodel@morningstar.com. |
