Wireless stocks became the darling of Wall Street this year.
Just a year ago analysts were predicting the death of stand-alone wireless stocks as landline companies planned to fold their wireless assets in with the rest of their companies to reflect their desires to be full service network operators.
It isn’t working out that way. Growth of the wireless industry has far exceeded analysts’ expectations, and the value of the wireless business isn’t reflected in these integrated stocks. Hence, AT&T Corp. last week formally announced plans to create a new wireless company and a new class of AT&T common stock that will track its performance. Other integrated companies are not far behind, with both BellSouth Corp. and Bell Atlantic Corp. contemplating similar moves. Sprint Corp.’s tracking stock for its wireless business by the third quarter was the third-best performing stock on the S&P 500.
“The tracking-stock phenomenon seems to be catching on because high value businesses such as wireless and the Internet are not realizing their true potential in the stock market as part of larger companies,” said John Bensche, wireless analyst with Lehman Brothers Inc., which in September dramatically upped its long-term forecast for the wireless industry and upgraded a number of wireless stocks.
In late 1998, AT&T Corp. was planning to pull its wireless division into the corporation by this year, but changed its plans when it saw the Digital One Rate plan reaping financial success for the business. Still, it scrapped plans in January to create a separate class of stock that would have tracked its wireless business and the cable TV business. AT&T management wanted to wait for the time when the wireless unit could stand alone.
Today, the timing seems right. AT&T Wireless Services Inc. is leading the wireless industry with its 40-percent revenue growth and rising average revenue per user each quarter. With AT&T pumping large amounts of money into upgrading its cable networks to provide local telephony service, investors have worried about the cost, and those worries have shown up in the company’s stock price. Using the bullishness of wireless stocks to date as a model, the combined value of the wireless stock and the nonwireless stock will be greater than the value of AT&T’s stock price today.
The need for acquisitions is another factor fueling the wireless tracking-stock trend, say analysts. The new wireless unit, AT&T Wireless Group, could raise as much as $10 billion this spring. AT&T has been busy buying up smaller operators to build out its footprint and eliminate roaming fees. AT&T also is looking to expand its wireless presence internationally.
AT&T’s new tracking stock will reflect the performance of AT&T’s domestic and international mobile and fixed wireless operations. John Zeglis, current AT&T president, will become chairman and chief executive officer of the new wireless group, while Dan Hesse will remain president and CEO of AT&T Wireless Services, the new mobility group. Michael Keith, currently vice president of AT&T Business Services, will be responsible for developing and launching the fixed wireless business.
AT&T’s extensive plans to use fixed wireless to primarily penetrate residential and small businesses surprised some analysts. The corporation’s cable business, which AT&T is upgrading to provide local telephony, only covers 50 percent of the U.S. market, and AT&T expects to use fixed wireless to penetrate the rest.
AT&T’s fixed wireless initiative, Project Angel, now renamed the AT&T National Wireless Local Exchange Carrier, originally was conceived as a way to bypass the local phone carrier, but AT&T has reconfigured it to offer high data speeds up to 1 megabit per second. The carrier has driven down the cost of providing wireless fixed access to about $750, matching cost of circuit-switched cable telephony.
Zeglis said it will roll out fixed wireless service in three metro areas, only naming Fort Worth. He said the company plans to spend $350 million, addressing 1.5 million households in those three markets next year. A personal base station will enable cellular telephones in the home to operate like a cordless handset, with no airtime charges for calls. AT&T hopes to garner 30 percent of the voice market within five years.
Another component of the tracking stock will be a venture capital fund that will invest in e-business. AT&T wants to provide seed capital to wireless data companies to drive data innovations. Bensche noted AT&T’s initial $1 million investment in Phone.com today is worth $250 million.
