AT & T Stock Withers After Big Downgrade

10/15/2000 8:00 PM Eastern

AT & T Corp. shares continued to slide last week, after they reached a 52-week low Oct. 6 following an influential Wall Street analyst's downgrade.

The company's share price fell to $26.38 in early trading Oct. 6-before rebounding to close at $27.31, off $1.56 or 5.41 percent-after analyst Jack Grubman of Salomon Smith Barney Inc. downgraded the stock from "buy" to "outperform."

AT & T shares continued to fall in early trading Monday, dropping 13 cents, to $26.44.

The downturn comes amid Wall Street rumblings that the company is on the path to making radical changes to bolster its sagging stock. AT & T shares are off more than 53 percent from their 52-week high of $61 in December.

Grubman-who had been one of AT & T's biggest supporters during its stock slide this year-also lowered his 2000 earnings estimate for the company by 8 cents per share. The analyst also lowered his 12-month price target on AT & T to $37 from $65, citing sluggish fundamentals, a lack of visibility in the company's future growth and $2 billion in contingent liabilities from Excite@Home Corp. "puts."

As part of its deal to gain more voting control of data-over-cable provider Excite@Home, AT & T has the option to buy about 30 million Excite shares from both Comcast Corp. and Cox Communications Inc. at $48 apiece. Excite@Home closed down $1.56, to $10.44, on Oct. 6.

Grubman wrote that AT & T will have to make up the difference in the strike price of the put options in either cash or its own stock, and report the transaction in its third-quarter financial statement.

Given the deflated price of Excite@Home, that difference could be as high as $2.2 billion.

A lack of guidance from AT & T, coupled with an earnings warning from No. 3 long distance provider Sprint Corp., caused Grubman to reduce his 2000 earnings estimate for AT & T to $1.65 from $1.73. He also reduced his 2001 earnings estimate to $1.55 from $1.97, the report said.

"AT & T is in the process of figuring out how to restructure the company and therefore, the downside may be limited," Grubman wrote.

Grubman had been under fire recently for maintaining his rating on AT & T when most other analysts have revised their ratings downward. His downgrade of the stock came just two days after the analyst was the subject of an article inTheWall Street Journalthat criticized his failure to revise his rating.

Speculation about AT & T's next move has been rampant since its annual board of directors retreat last month. While the company will not comment about its plans, several published reports have said AT & T is leaning toward spinning off its long-distance business, forming an alliance with United Kingdom telephone company British Telecommunications plc, or combining its wireless-telephone assets with Nextel Communications Inc.

In a published report earlier last week, BT chief executive Peter Bonfield quashed any speculation of a merger between AT & T and BT.

"The idea that BT and AT & T are going to's not going to be," he told theLondon Times.

Grubman, in his report, declined to speculate on AT & T's actual plans. However, he wrote that any spinoff of the long-distance business should also include AT & T's cable assets.

"There is no question that AT & T is probably better off splitting into two or more focused entities," Grubman wrote. "However, we believe that any financial restructuring should be done along operating lines that make sense. Meaning, a separation of consumer long distance would only make sense if the cable operations are included, since the reason AT & T purchased the cable plant was in order to bundle products to the consumer."

Grubman added that spinning off the long-distance business would require federal and perhaps state regulatory approvals and could take at least a year to complete.

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