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Technology Stocks : AT&T -- Ignore unavailable to you. Want to Upgrade?

To: Raptech who wrote (1779)	1/5/1999 10:38:00 PM
From: Ian@SI	Read Replies (1) \| Respond to of 4298

Rap, ( Edited to add Tracker info and price target at 10:47PM...) This was part of the original announcement with very few details as to exactly what, when, or how the tracking stock would be established. It allows a better valuation to be placed on the various businesses that T would be in rather than blending all of the capital intensive components with the bottom line profit generating components into one melting pot. Essentially, I'll wait until Armstrong and cohort decides what they're going to do and how they're going to do it. Based upon the results seen from other companies that have gone this route (especially BCE), it could add significant value compared with no tracking stock; as well as giving investors choices as to what specific businesses they choose to own and in what proportion. FWIW, Ian. P.S. Check askmerrill.com for more info on this subject and others related to T. You have to register before you can access the report. It cleared up my confusion re the price target. Opinion & Financial Data We are upgrading T shares to 2-1 from 3-2. Our 12-18 mo. price obj. is $94, 24% upside, the avg of two valuation methods. Sum of parts method yields value of $101/sh with cable/wireless “tracker” at a conservative 11.5x ‘00E EBITDA and the remainder of T at 23.3x (.9 rel.) '00E EPS of $3.74 which we fcst will grow 12% ‘00-‘04. The 2 nd method values T's fully diluted EPS, which we fcst to grow 18% ‘00-'04, at a mkt. PE of 26x '00E EPS of $3.35, yielding $87/sh. 3. This week, we expect AT&T to file its final plans for a “tracker” or “letter” stock for its cable and wireless units. By segregating highly dilutive activities from its ongoing businesses, we believe there is a good chance investors will begin to value AT&T on a sum-of-the-parts basis as they have done with Sprint. This would convert a significant near term negative ($1.00/sh of TCI-related dilution) into a positive that investors can value using methods more tolerant of capital-intensive startups (e.g., DCF, EBITDA multiples). Our 12-18 month $101 sum-of- the-parts value represents 33% upside and is comprised of 2 pieces: (a) 80% of the cable and wireless tracker valued at 11.5x 2000 est. EBITDA of $4.6B ($14/sh.); and (b) LD Co. valued at a 90% relative PE to the S&P multiple of 26x, or 23.4x. Our 2000 EPS estimate for LD Co, standalone (i.e., without 80% of C&W dilution factored in) is $3.74, which we forecast to grow 11.5% CAGR ‘00-‘04. This yields $87.50 (26 x .90 x $3.74) for LD Co. and brings the total to $101 ($87.50+$14 for C&W Co.). Our Expectations for the Tracker: On January 6, we expect AT&T to file with the SEC the final details of its TCI acquisition, including plans to separate the company into two trading instruments: (a) A tracker or letter stock for its cable and wireless units, but excluding consumer LD, which we label “C&W Co.”; and (b) The remainder of AT&T which we label “LD Co.” which we believe will include AT&T's LD units, AT&T Solutions, Worldnet, Teleport and its overseas activities including its JV with BT. We believe any additional wireless or cable acquisitions/JVs will be undertaken via C&W Co. We expect the C&W Co. “tracker” to begin trading in late Spring, most likely via an exchange offer (whereby AT&T holders can exchange T shares into “C&W Co.” tracker shares) and via an IPO of around 10% of the company. We expect AT&T will own 80% of the tracker and will thus report EPS in 2 ways: before and after consolidating 80% of the tracker's EPS. We expect C&W Co. EPS to be negative through 2001 as TCI acquisition goodwill and cable telephony rollout costs are absorbed but to rebound quite dramatically from d$0.50 per T share in 1999 to +$1.00 assuming 15% and $1.75 assuming 30% cable telephony penetration in 2004 (we assume 15%.). (Note: Our forecasts and valuations assume the 2 part structure described above . We plan to make necessary adjustments once we have reviewed the SEC filing expected on 1/6.)