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AT&T's Discount Won't Bring Buyers

By Steve Rosenbush On Aug. 4, ailing telecom giant AT&T (T) admitted that much of the value it has lost over the years is probably gone for good. In a filing with the Securities & Exchange Commission, the outfit said it may write down its assets by a yet-to-be determined amount. Some experts have pegged the value of the writedown as high as $8 billion.

The filing raises the question of whether AT&T, which went on a huge acquisition binge during the late 1990s, might be more of an acquisition target now that the company is worth less on paper. But the consensus among investment bankers, analysts, and industry executives is that a writedown, should it occur, won't have much bearing on AT&T's ability to attract a suitor. True, a smaller company would presumably be easier for a potential acquirer to digest. But "it's unlikely to make a huge difference," says David Barden, telecom analyst with Banc of America Securities, who thinks the value of the writedown probably won't exceed $8 billion.

For one thing, the writedown is an accounting maneuver that doesn't require the company to come up with any cash. And since AT&T warned Wall Street in June that it wouldn't be able to meet earlier financial expectations, the writedown is already largely figured into the stock price, experts say. The stock has dropped about 20% since the June announcement. It declined 52 cents, or 3.5%, on Aug. 5, to $14.24.

SCARY UNIT. The writedown was triggered by AT&T's announcement last month to pull back from the consumer market, which accounts for 25% of its revenue. In 2003, it had $34.5 billion in sales. The telco, which developed phone service more than a century ago, is fighting the tide of history, as new technologies like the Internet and wireless phones cut into its business. Regulatory changes also have made it easier for the Baby Bells, the big local phone companies, to compete in AT&T's core long-distance business.

Many of AT&T assets are desirable, but fundamental obstacles still stand in the way of a big telecom outfit sweeping in to make a bid, experts say. AT&T's declining revenues would depress an acquirer's growth prospects and stock price. Over time, this problem will subside. As AT&T's consumer business slowly disappears, it will be less of a drag on the outfit's overall financial profile. But for now, and for the foreseeable future, the consumer unit is scaring buyers off.

The most likely buyers are busy with other projects. BellSouth (BLS) and SBC Communications (SBC) are completing their acquisition of AT&T Wireless (AWE), which will be folded into their Cingular wireless business. And Verizon (VZ) is focused on expanding its wireless and broadband operations and is working to reduce debt. None of these players are too eager to rush into AT&T's key market, serving multinational corporations. That's a high-profile niche, but margins are better at the lower and middle rungs of the business market. The Bells can build their share of that market organically, analysts say.

EARNINGS POLISH. AT&T's pullback from the consumer segment seems to be an acknowledgement of how the market has changed. And the writedown is another helpful step in dealing with its tough financial situation. AT&T declined to comment. But potential buyers feel no sense of urgency about acquiring AT&T, says Barden. They're likely betting that AT&T, which has a current market cap of $11 billion, plus another $9 billion in debt, will become cheaper as time goes on.

A writedown could encourage a potential acquirer in one way. It would strengthen AT&T's balance sheet and improve its price-to-earnings ratio. "AT&T seen as going from a dilutive acquisition target to an accretive acquisition target at the earnings and [price-to-earnings] level," Borden says. Still, that doesn't do anything to address the telco's declining growth rate, which is what most potential buyers are concerned about.

The biggest change may be psychological. Last year, AT&T was in talks to sell itself to BellSouth, but the negotiations fell apart because the two companies reportedly couldn't agree on price. A writedown may suggest that AT&T's view of its long-term prospects has changed -- and that it will be more flexible if it finds itself at the negotiating table once again. Rosenbush is a writer for BusinessWeek Online in New York

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