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Comcast Deal Gives AT&T Debt Relief

The official sale Monday of its cable unit leaves telephone titan AT&T Corp. with a stronger balance sheet and the opportunity to focus on its lucrative business unit and struggling consumer segment, Wall Street analysts say.


AT&T yesterday officially closed the sale of its cable unit, AT&T Broadband, to Comcast Corp. The nearly $30 billion transaction forges a cable leviathan serving more than 21.4 million customers and removes around $24 billion of debt from AT&T’s books. AT&T also completed its 1-5 reverse stock split, which reduces the number of outstanding shares to approximately 770 million.


“The company is in better financial condition than its peers,” says Davenport & Co. analyst Drake Johnstone, who rates AT&T a neutral and not a buy because in part AT&T is not cutting costs fast enough to offset consumer revenue declines. “It is significantly outperforming its rivals.”


On Monday Standard & Poor’s — one of the three agencies rating the debt of public companies – affirmed its investment grade BBB+ and A-2 credit ratings on AT&T and removed the long-term ratings from CreditWatch.


Fitch Ratings took similar action today, affirming its BBB+ rating of AT&T’s senior unsecured debt and the F2 commercial paper rating and removing the company’s senior unsecured rating from rating watch negative. The rating outlook is stable.


“Fitch’s rating and outlook reflects AT&T’s strong capital structure and credit profile relative to its rating resulting from the separation of AT&T Broadband, AT&T’s strong liquidity position, free cash-flow generation capabilities and the elimination of the overhang related to AT&T’s back-end obligation to AT&T Canada,” Fitch was quoted in a statement.


AT&T recently purchased the remaining equity in AT&T Canada for about $3.4 billion to $3.5 billion, fulfilling an agreement signed in 1999, for what a Fitch Ratings spokesman estimated is a 10 percent stake in the beleaguered company. But AT&T will not have to service AT&T Canada’s debt because AT&T Canada is in the process of eliminating $4.5 billion in debt in exchange for cash and equity under a reorganization plan. An AT&T spokeswoman says AT&T is still in discussions with AT&T Canada regarding what its stake will be.


Clearly though the Comcast agreement represents the greatest debt relief for AT&T, the No. 1 long-distance provider. Kaufman Bros. analysts, who reiterate a buy on AT&T, say Tuesday in a research note the phone giant is expected “to be left with perhaps the least leveraged balance sheet among the large-cap telcos with only $17 billion in debt.”


The analysts predict AT&T will generate $34.5 billion in revenue, $9.4 billion in EBITDA (earnings before interest, taxes, depreciation and amortization) and around $1.8 billion in free cash flow in 2003.


And the sale removes conflicts of interest between the cable division and AT&T’s other units, says Commerce Capital Markets analyst Anna-Maria Kovacs in a research note released Nov. 14.


“In the past AT&T’s ability to respond to challenges has been somewhat tempered by its ambivalence between the interests of its cable operations and its other local operations. Post-split it will have no such conflict,” she says.


However, analysts caution AT&T still has its work cut out, including within the consumer segment where its long-distance revenue continues to decline in the face of competition from the regional bell operating companies and other rivals such as wireless carriers. AT&T, much like scandal-ridden rival WorldCom Inc., aims to offset the decline in long-distance revenue by reselling local phone service through the unbundled network element – platform.


However, the Federal Communications Commission is scheduled to issue new rules soon on the resale platform. The rules could make it impractical for AT&T to continue its local strategy if the wholesale rates AT&T pays the Bells are raised and the resale method is phased out.


Lehman Bros. analyst Blake Bath expressed the most bearish views on AT&T out of the Wall Street research that could be obtained Tuesday. Bath, who lowered his rating on AT&T to underweight, forecast in a report Monday the consumer unit would be shut down or sold within two years.


“We see nothing that can reverse the trend-like declines in revenue and EBITDA at consumer that would otherwise leave the unit at EBITDA breakeven by [fourth quarter 2003] and certainly EBIT-negative due to the estimated [$4 billion] in debt we allocate to the unit,” says Bath, rendering the consumer unit effectively worthless.

Davenport’s Johnstone says AT&T’s business unit drives most of its value today. “It’s [the consumer unit] not worth a lot,” he says, but “I’m not sure that is a reason to slap a sell on them.”

Shares of AT&T were trading at 26.88 Tuesday afternoon on the New York Stock Exchange.


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