News

AT&T REACHES OUT

10/22/2000 8:00 PM Eastern

AT&T Corp. chairman C. Michael Armstrong is keeping busy these days, weighing such options as spinning off the company's long-distance business in an effort to stem the punishing losses absorbed by the company's shareholders.

But he still found time last week to seek help from President Clinton in lifting federal limits on cable-system ownership, annoying consumer groups in the process.

AT&T, the nation's biggest MSO, is slated to announce third-quarter earnings Wednesday (Oct. 25). That could be a perfect opportunity for the company to answer the many questions about its restructuring plans.

"I think they're going to have to say something about their consumer[
long-distance]business," said The Yankee Group Inc. analyst Brian Adamik. "I don't know if it's completely baked yet, but I would think that at minimum they are going to say that they are studying the potential of spinning it off.

"It is my expectation that we will hear something other than just earnings at the earnings announcement Wednesday."

Whether AT&T will offer that guidance remains to be seen. Analysts and AT&T watchers also expected big news from the company's annual management retreat in September, only to be disappointed when no announcements were made.

AT&T scheduled a quarterly board meeting for Sunday and Monday (Oct. 22 and 23), where a long-distance spinoff will be among the topics of discussion.

Creating a new long-distance company in which AT&T would hold an interest isn't the only potential remedy Ma Bell's board will hash out.

According to one AT&T insider, other topics of discussion include a restructuring of its wireless business and the possible issuance of a tracking stock for its cable operations.

Spinning off the cable division is unlikely because of tax consequences. But apparently "everything is subject to review."

An AT&T spokesman declined to comment.

AT&T has been under intense pressure to make a move to bolster its sagging stock price-down 57 percent from early December. The stock hit a new 52-week low ($21.25 each) in early trading Oct. 18, before closing at $23.38. It rallied the next day, riding an overall market upturn to close at $24.81, up $1.43. AT&T ticked up 5 percent, or $1.25, to $26.06 in early trading last Friday.

AT&T also has some unfinished business in Washington related to its acquisition of MediaOne Group Inc and its 5 million subscribers. In approving the merger, the Federal Communications Commission gave AT&T three choices to comply with subscriber-ownership limits. It has until May 19, 2001, to sell 9.7 million cable subscribers, divest its 25 percent interest in Time Warner Entertainment or sell Liberty Media Group and other programming interests.

AT&T would like to sell its TWE stake to Time Warner, but has had little success in persuading Time Warner to pay an acceptable price, hence last week's missive to Clinton.

In the Oct. 17 letter, Armstrong sought Clinton's support for AT & T's position that FCC rules are too stringent and must be relaxed, particularly because no limits apply to phone companies or direct-broadcast satellite carriers.

Rather than seeking a change in the overall limit-30 percent of all pay-TV subscribers-Armstrong said that AT&T wants a change in the FCC's attribution rules. Those rules state that if AT&T owns 5 percent of a cable company, all of that company's subscribers fall into its ownership column.

"AT&T supports a modification of the rule that would attribute a cable system's subscribers to a provider that owns the system, controls the system, or influences the system's selection of programming," Armstrong wrote.

Gene Kimmelman, co-director of the Consumers Union's Washington office, blasted Armstrong's letter as a "blatant attempt by AT&T to circumvent the conditions it agreed to when the FCC cleared the AT & T-MediaOne merger."

Sen. Ted Stevens (R-Alaska), chairman of the Appropriations Committee, has said he is trying to help AT&T get around the system-ownership restrictions. But last week, Senate Commerce Committee chairman John McCain (R-Ariz.) said he opposes an effort to pass a law that would allow AT&T to escape those limits.

In an Oct. 19 letter to Stevens, McCain said he would oppose inserting a break for AT&T that had not been reviewed by his Commerce panel into an end-of-session spending bill.

"Failing to utilize the proper committee process risks alienating the public and casting doubt upon the integrity of the legislative process," McCain said.

McCain's letter did not mention AT&T by name. Instead, he referred to "legislative riders," including one that would alter the FCC's cable-ownership rules.

Without addressing the merits of AT & T's claim, McCain said he was troubled that Stevens was considering loading his spending bills with breaks for special interests.

"The American people are watching to see how responsibly we manage the nation's fiscal well-being, and whether the special interests or the taxpayers'interests will prevail," McCain said.

A spokeswoman for Senate Majority Leader Trent Lott (R-Miss.) said the senator was not ruling out help for AT&T. The controversy surrounding the provision might keep it out of legislation to fund the FCC and other independent agencies, she said.

Lott "has indicated that if that is something that is going to slow down the bill, then it probably should not be included," the spokeswoman said.

Armstrong hinted last week that there could be some restructuring news on the way. He told theWall Street Journal: "If the value of this company can't be reached in the construction that it is, I have to think about delivering shareholder value."

Perhaps the best way to deliver that value is through splitting off some company assets.

Armstrong's new-found candor comes months after an onslaught of criticism from Liberty Media Group chairman and major AT&T shareholder John Malone. Malone, to the chagrin of other AT&T directors, has put forth possible remedies in several published reports, including combining consumer long-distance and networking operations into a separate tracking stock and focusing more on content.

Spinning off the long-distance business, which could please Wall Street, might have a detrimental effect on AT & T's other business lines, mainly because long-distance cash flow helps to service debt.

The long-distance business brings in about $8 billion in cash flow annually, although that number is declining.

According to some sources, AT&T is leaning toward spinning off its long-distance business sometime between April and May through an exchange. For example, if a shareholder had 100 shares of AT&T they would get 10 shares of the long-distance spinoff. AT&T would then issue a dividend to itself to help service those other businesses.

AT&T has caught considerable heat from the investment community for the perceived failure of its cable-telephony strategy. It had once expected to have 800,000 cable telephony subscribers by now, either through direct connections to its cable operations or alliances with other MSOs. It has lowered those expectations to between 500,000 and 650,000 customers by year-end.

Those MSO alliances have also been slow to come.

AT&T has reached one deal through which it will provide service over Insight Communications Co.'s cable lines. Insight is expected to launch the service in Louisville, Ky., early next year, and plans to roll it out company-wide within the next three years.

"We're moving well along," Insight chief operating officer Kim Kelly said last week. "I couldn't be more happy with it."

AT&T is a 50-50 partner with Insight in its Midwest systems. The two are also moving toward expanding that joint venture to include all of Insight's operations. That deal should close by the end of the year.

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