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AT&T Hits a $5 Billion Wall


Will Mike Armstrong ever get a break? Just as AT&T (T) is embarking on a possible merger with offshoot BellSouth Corp., BusinessWeek has learned he now has to navigate a treacherous cash crunch.

Armstrong announced Oct. 3 that AT&T would cut capital spending at the core telecom unit next year by 20%, or about $1 billion. And one AT&T source says the $3.5 billion capital budget at its cable unit could be cut by up to $1 billion. Armstrong is also contemplating a debt offering of as much as $5 billion to $6 billion to bolster its reserves, according to sources. Those reserves had stood at $9.7 billion at the close of the second quarter. AT&T's current cash level won't be released until third-quarter financial results are announced later this month.

"LITTLE LEVERAGE." AT&T execs won't comment on their cash position. But the need to raise funds is a stark sign that AT&T's bind is far worse than many on Wall Street now realize. It will force AT&T to make even larger debt payments at a time when it can ill afford extra costs. Even more critical, added debt will give the telecom giant little negotiating room with BellSouth (BLS). "AT&T has very little leverage. They are at the mercy of whomever wants to purchase them," says Scott Cleland, CEO of Precursor Group, a telecom research firm in Washington.

How did things go from bad to worse in seemingly no time at all? For starters, AT&T has been unable to raise urgently needed cash through sales of its minority stakes in cable outfits Time Warner Entertainment and Cablevision Systems Corp. AT&T had hoped that AOL Time Warner Inc. (AOL) would pony up roughly $9 billion for the Time Warner stake alone, but the two sides have been bogged down in price negotiations. An additional $7 billion to $9 billion never materialized when AT&T scotched the AT&T Broadband public offering, following a bid for the cable unit by Comcast Corp. (CMCSA) in August.

The economic slowdown has also taken a big toll. Even before the terrorist attacks last month, both its business and consumer units had been falling off sharply, insiders say. With prices falling, AT&T has been rapidly losing share in the consumer long-distance market. And industrywide revenue growth from the sale of high-speed data services is only 15%, about half what was expected.

So why does BellSouth want AT&T and all the problems that come with it? For Atlanta-based BellSouth, which delivers local phone service to nine Southern states, snaring AT&T would enable the Baby Bell to go beyond its current status as a regional player, and it would deliver global corporate customers.

So far, the talks have included several possible scenarios. AT&T may sell its cable business to Philadelphia-based Comcast. That would give Armstrong a free hand to cut a deal to combine the remaining consumer and business-services units with BellSouth's local-phone networks. Alternatively, BellSouth might even bid for all of AT&T, including its cable assets. The terms of any deal and who would run the new company are still open, though Armstrong is looking for a merger of equals. BellSouth declined to comment, but one inside source confirmed serious talks are underway.

Now, adding to all the other complications is the prospect of a big chunk of new debt. Moody's Investors Service already has AT&T on credit watch with a rating of A2, the lowest level in its top tier. Standard & Poor's also has AT&T under credit watch with a rating of A. Far more critical, any new evidence of financial problems at AT&T could reduce the price BellSouth CEO F. Duane Ackerman is willing to pay.

MISGIVINGS. Moreover, there's still dissent within BellSouth over whether or not AT&T is a suitable partner. One faction within management feels that "Sprint is much closer to BellSouth in terms of its fiscally conservative management style and is much better managed than AT&T," says one source.

Those doubts are well placed. All long-distance companies suffer from falling prices and slowing growth. And BellSouth would inherit AT&T's stake in bankrupt Internet company, Excite@Home, as well as its the troubled Concert venture with British Telecommunications PLC.

If a deal doesn't get done, the downside may be felt by the entire telecom sector. Consolidation could help bring about a healthier, leaner industry, one reason why regulators might approve a reunion of AT&T with a part of the original Bell system. "Approval is possible, although it would have Kevlar-strength conditions," says Precursor's Cleland. AT&T might have to divest all its assets in BellSouth's home markets in the Southeast, "down to every last paper clip." That just might be a price Mike Armstrong would willingly pay. Will Mike Armstrong ever get a break? Just as AT&T (T) is embarking on a possible merger with offshoot BellSouth Corp., BusinessWeek has learned he now has to navigate a treacherous cash crunch.

Armstrong announced Oct. 3 that AT&T would cut capital spending at the core telecom unit next year by 20%, or about $1 billion. And one AT&T source says the $3.5 billion capital budget at its cable unit could be cut by up to $1 billion. Armstrong is also contemplating a debt offering of as much as $5 billion to $6 billion to bolster its reserves, according to sources. Those reserves had stood at $9.7 billion at the close of the second quarter. AT&T's current cash level won't be released until third-quarter financial results are announced later this month.

"LITTLE LEVERAGE." AT&T execs won't comment on their cash position. But the need to raise funds is a stark sign that AT&T's bind is far worse than many on Wall Street now realize. It will force AT&T to make even larger debt payments at a time when it can ill afford extra costs. Even more critical, added debt will give the telecom giant little negotiating room with BellSouth (BLS). "AT&T has very little leverage. They are at the mercy of whomever wants to purchase them," says Scott Cleland, CEO of Precursor Group, a telecom research firm in Washington.

How did things go from bad to worse in seemingly no time at all? For starters, AT&T has been unable to raise urgently needed cash through sales of its minority stakes in cable outfits Time Warner Entertainment and Cablevision Systems Corp. AT&T had hoped that AOL Time Warner Inc. (AOL) would pony up roughly $9 billion for the Time Warner stake alone, but the two sides have been bogged down in price negotiations. An additional $7 billion to $9 billion never materialized when AT&T scotched the AT&T Broadband public offering, following a bid for the cable unit by Comcast Corp. (CMCSA) in August.

The economic slowdown has also taken a big toll. Even before the terrorist attacks last month, both its business and consumer units had been falling off sharply, insiders say. With prices falling, AT&T has been rapidly losing share in the consumer long-distance market. And industrywide revenue growth from the sale of high-speed data services is only 15%, about half what was expected.

So why does BellSouth want AT&T and all the problems that come with it? For Atlanta-based BellSouth, which delivers local phone service to nine Southern states, snaring AT&T would enable the Baby Bell to go beyond its current status as a regional player, and it would deliver global corporate customers.

So far, the talks have included several possible scenarios. AT&T may sell its cable business to Philadelphia-based Comcast. That would give Armstrong a free hand to cut a deal to combine the remaining consumer and business-services units with BellSouth's local-phone networks. Alternatively, BellSouth might even bid for all of AT&T, including its cable assets. The terms of any deal and who would run the new company are still open, though Armstrong is looking for a merger of equals. BellSouth declined to comment, but one inside source confirmed serious talks are underway.

Now, adding to all the other complications is the prospect of a big chunk of new debt. Moody's Investors Service already has AT&T on credit watch with a rating of A2, the lowest level in its top tier. Standard & Poor's also has AT&T under credit watch with a rating of A. Far more critical, any new evidence of financial problems at AT&T could reduce the price BellSouth CEO F. Duane Ackerman is willing to pay.

MISGIVINGS. Moreover, there's still dissent within BellSouth over whether or not AT&T is a suitable partner. One faction within management feels that "Sprint is much closer to BellSouth in terms of its fiscally conservative management style and is much better managed than AT&T," says one source.

Those doubts are well placed. All long-distance companies suffer from falling prices and slowing growth. And BellSouth would inherit AT&T's stake in bankrupt Internet company, Excite@Home, as well as its the troubled Concert venture with British Telecommunications PLC.

If a deal doesn't get done, the downside may be felt by the entire telecom sector. Consolidation could help bring about a healthier, leaner industry, one reason why regulators might approve a reunion of AT&T with a part of the original Bell system. "Approval is possible, although it would have Kevlar-strength conditions," says Precursor's Cleland. AT&T might have to divest all its assets in BellSouth's home markets in the Southeast, "down to every last paper clip." That just might be a price Mike Armstrong would willingly pay. Will Mike Armstrong ever get a break? Just as AT&T (T) is embarking on a possible merger with offshoot BellSouth Corp., BusinessWeek has learned he now has to navigate a treacherous cash crunch.

Armstrong announced Oct. 3 that AT&T would cut capital spending at the core telecom unit next year by 20%, or about $1 billion. And one AT&T source says the $3.5 billion capital budget at its cable unit could be cut by up to $1 billion. Armstrong is also contemplating a debt offering of as much as $5 billion to $6 billion to bolster its reserves, according to sources. Those reserves had stood at $9.7 billion at the close of the second quarter. AT&T's current cash level won't be released until third-quarter financial results are announced later this month.

"LITTLE LEVERAGE." AT&T execs won't comment on their cash position. But the need to raise funds is a stark sign that AT&T's bind is far worse than many on Wall Street now realize. It will force AT&T to make even larger debt payments at a time when it can ill afford extra costs. Even more critical, added debt will give the telecom giant little negotiating room with BellSouth (BLS). "AT&T has very little leverage. They are at the mercy of whomever wants to purchase them," says Scott Cleland, CEO of Precursor Group, a telecom research firm in Washington.

How did things go from bad to worse in seemingly no time at all? For starters, AT&T has been unable to raise urgently needed cash through sales of its minority stakes in cable outfits Time Warner Entertainment and Cablevision Systems Corp. AT&T had hoped that AOL Time Warner Inc. (AOL) would pony up roughly $9 billion for the Time Warner stake alone, but the two sides have been bogged down in price negotiations. An additional $7 billion to $9 billion never materialized when AT&T scotched the AT&T Broadband public offering, following a bid for the cable unit by Comcast Corp. (CMCSA) in August.

The economic slowdown has also taken a big toll. Even before the terrorist attacks last month, both its business and consumer units had been falling off sharply, insiders say. With prices falling, AT&T has been rapidly losing share in the consumer long-distance market. And industrywide revenue growth from the sale of high-speed data services is only 15%, about half what was expected.

So why does BellSouth want AT&T and all the problems that come with it? For Atlanta-based BellSouth, which delivers local phone service to nine Southern states, snaring AT&T would enable the Baby Bell to go beyond its current status as a regional player, and it would deliver global corporate customers.

So far, the talks have included several possible scenarios. AT&T may sell its cable business to Philadelphia-based Comcast. That would give Armstrong a free hand to cut a deal to combine the remaining consumer and business-services units with BellSouth's local-phone networks. Alternatively, BellSouth might even bid for all of AT&T, including its cable assets. The terms of any deal and who would run the new company are still open, though Armstrong is looking for a merger of equals. BellSouth declined to comment, but one inside source confirmed serious talks are underway.

Now, adding to all the other complications is the prospect of a big chunk of new debt. Moody's Investors Service already has AT&T on credit watch with a rating of A2, the lowest level in its top tier. Standard & Poor's also has AT&T under credit watch with a rating of A. Far more critical, any new evidence of financial problems at AT&T could reduce the price BellSouth CEO F. Duane Ackerman is willing to pay.

MISGIVINGS. Moreover, there's still dissent within BellSouth over whether or not AT&T is a suitable partner. One faction within management feels that "Sprint is much closer to BellSouth in terms of its fiscally conservative management style and is much better managed than AT&T," says one source.

Those doubts are well placed. All long-distance companies suffer from falling prices and slowing growth. And BellSouth would inherit AT&T's stake in bankrupt Internet company, Excite@Home, as well as its the troubled Concert venture with British Telecommunications PLC.

If a deal doesn't get done, the downside may be felt by the entire telecom sector. Consolidation could help bring about a healthier, leaner industry, one reason why regulators might approve a reunion of AT&T with a part of the original Bell system. "Approval is possible, although it would have Kevlar-strength conditions," says Precursor's Cleland. AT&T might have to divest all its assets in BellSouth's home markets in the Southeast, "down to every last paper clip." That just might be a price Mike Armstrong would willingly pay. By Steve Rosenbush in New York, with Ron Grover in Los Angeles and Charles Haddad in Atlanta

By Steve Rosenbush in New York, with Ron Grover in Los Angeles and Charles Haddad in Atlanta

By Steve Rosenbush in New York, with Ron Grover in Los Angeles and Charles Haddad in Atlanta


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