AT&T Wireless Services Inc. took another step toward freedom last week as parent company AT&T Corp. completed the first part of its planned distribution of its 70-percent stake in AT&T Wireless to its common shareholders, with less-than-stellar results. The offering was part of AT&T’s plans to reconfigure the company into four separate units: AT&T Wireless; Broadband; Consumer; and Business.
Last week’s exchange offering allowed current AT&T shareholders to swap each one of their shares of AT&T for 1.176 shares of AT&T Wireless. The offering, which the Internal Revenue Service ruled would be tax-free for AT&T and its shareholders for federal income tax purposes, was initially limited to 428 million AT&T shares, or approximately 11 percent of the telecom giant’s 3.8 billion outstanding shares.
But, by the close of the offering last Tuesday, only 373 million shares of AT&T were exchanged for 438 million shares of AT&T Wireless, leaving approximately 13 percent of the possible subscribed shares of AT&T still in the company’s hands.
Peter Friedland, wireless analyst with W.R. Hambrecht + Co., said in a research note the lukewarm reception was due to the fact AT&T shareholders are expecting to receive a large distribution of AT&T Wireless shares later this year in a stock dividend.
“Based on the 3.8 billion [AT&T] shares outstanding prior to the exchange offer, shareholders were slated to receive 0.34 to 0.43 [AT&T Wireless] shares for each [AT&T] share in a stock dividend in mid-2001,” Friedland said. “Therefore, [AT&T] shareholders were going to receive a large distribution of [AT&T Wireless] stock regardless of their participation in the exchange offer. Moreover, given that [AT&T] is roughly 55-percent owned by retail investors, we believe the combination of the somewhat confusing nature of the exchange offer, and the fact that [AT&T Wireless] does not pay a dividend, may have together reduced retail participation in the exchange offer.”
Others may have held off unloading already low-priced AT&T stock for AT&T Wireless after the initial premium of 7 percent was reduced to 1 percent prior to the offering.
Friedland noted the move showed AT&T stockholders might be more interested in owning a more diversified assortment of telecom assets, instead of putting all of their eggs in one wireless basket.
AT&T stock was trading at around $21.25 per share in early Tuesday trading, before slumping to around $20.50 per share by the end of the day. AT&T Wireless tracking stock dropped immediately on Tuesday from $18 per share to less than $17 per share, before rebounding to around $17.25 by close. AT&T Wireless was trading as high as $27 per share in early February.
The lack of interest in the offering leaves AT&T with an additional 1 billion shares of AT&T Wireless stock to pass out to shareholders later this year, a move that may affect AT&T Wireless’ stock price in the meantime as the overhang is expected to dilute the stock value.
Even with the less-than-spectacular beginning of AT&T Wireless’ life out of its parent’s house, Friedland continues to back the move with a continued buy rating on its stock.
“We continue to believe that the separation of AT&T Wireless into an independent entity is a positive move for the company, as it removes any tracking stock discount; allows the company to be managed completely independent of the AT&T parent; and makes the company more nimble to be involved in potential merger activities, either as a buyer or target,” Friedland said.
