Proposed Spinoff of AT&T; Flagship Unit Is Baffling Analysts

Wall Street showed little enthusiasm Wednesday for reports that AT&T; Corp.’s board of directors favor spinning off its mammoth long-distance residential business to shareholders as part of a radical restructuring of the struggling telecommunications giant.

AT&T;’s stock rose a tepid 63 cents to close at $29.75 Wednesday on the New York Stock Exchange. The company’s shares have lost more than 40% of its value this year because of heavy competition in the long-distance business and expenses from its cable and wireless operations. All this has pressured AT&T; Chairman Michael Armstrong to take action to revitalize the company’s stock, analysts say.

The company remains mum about its plans, but speculation has been rampant for months that AT&T;’s board is considering proposals to sell, merge or spin off various parts of the company.

AT&T;’s long-distance business may be faltering, but last year it still generated $8 billion in cash flow for AT&T;, with operating profit margins of nearly 40% on $21.85 billion in revenues.

“What has this market come to when massive cash flow is a liability?” said Scott Cleland of the research firm Precursor Group.

Cleland also wonders why AT&T; would be willing to ditch its 60-million residential long-distance customers when nearly every other company sees a large customer base as the key to selling big bundles of other services such as cable and high-speed Internet access.

Another unanswered question involves AT&T;’s dividend plans. If the cash-cow long-distance unit gets passed to shareholders through a spinoff, would the company’s dividend burden of more than $3 billion a year go with it? If the long-distance business is sold instead, how does AT&T; pay the dividends and still have enough cash to invest in its growing cable, Internet and business communications businesses?

Those questions, perhaps more than any other, could determine what restructuring takes place at AT&T;, many analysts say.

AT&T; is said to also be pursuing a potential merger of its growing wireless phone business with rival Nextel Communications, and another deal with British Telecommunications involving both firm’s communication systems for corporate customers.

Topping the list of options is spinning off AT&T;’s consumer long-distance business into a separate shareholder-owned unit, according to industry sources.

But federal regulators will also play a role if AT&T; wants to make major changes.

Dorothy Attwood, the head of the Federal Communications Commission’s common carrier bureau, said Wednesday the agency would have to review the effects such a move would have on consumers. “I think we would definitely want to be very vigilant about the consumer ramifications,” Attwood said.

The residential long-distance business has for years been the company’s flagship operation, although over the past 15 years AT&T; has steadily lost ground to WorldCom, Sprint and other competitors.

Many industry analysts believe the deterioration of AT&T;’s long-distance business has been a big factor in the company’s stock price slump. And to them, a spinoff or sale of that business would be a plus.

“Our view is that the long-distance unit is the cancer, and that is what needs to be cut out,” said Andrew Cole, a vice president at Adventis, a Boston-based consulting firm.

Certainly, regulatory concerns would also be a major concern if AT&T; were to try to sell off the unit to another phone company. The FCC quashed the proposed merger of WorldCom and Sprint over concerns that the long-distance market would be too concentrated.

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Bloomberg and Reuters were used in compiling this report.