The Static In That At&T Wireless Ipo

Wall Street's frenzy, combined with the AT&T name, mask important red flags for investors

If all goes according to plan, Planet Earth's last human unclipped to either cell phone or pager will be me. Yet even I can't escape all the buzzing right now over everything wireless.

There's Verizon Wireless, which is Bell Atlantic and Vodafone AirTouch's just-merged wireless unit. GTE expects to join Verizon soon, while SBC Communications and BellSouth are merging their own wireless forces, too. Nextel just introduced global service, and Sprint PCS is being bought by MCI WorldCom. The loudest buzz? AT&T, which is set to take its wireless biz public on Apr. 26. It aims to raise over $10 billion--by far, the richest U.S. initial public offering ever.

With an IPO this large, AT&T must have something hot to sell. Whether you should buy is another question. AT&T execs are keeping quiet ahead of the deal, but securities filings spell out the details. In the past two years, AT&T Wireless Group has seen cellular subscribers soar past 12 million from 8 million, thanks to the popular Digital One Rate service launched in May, 1998. Last year, revenues surged 41%, to $7.6 billion. Never mind the sinking stock indexes: If Wall Street can't sell a deal with this pedigree, it had better close up shop. As Craig Ellis, manager of Orbitex Info-Tech & Communications Fund, says, "Even in this market, that deal is going to walk right off the shelf." Yet before you usher AT&T Wireless into your portfolio, think twice. Actually, think four times.

TRACKING STOCK. First, consider the peculiarities of the deal. Instead of selling straight stock, parent AT&T is offering what Wall Street calls tracking stock--shares designed to reflect the performance of a particular operation. Buy a share of AT&T Wireless and you'll have equity in the parent, not the wireless unit. So what? Among other dangers, tracking stock nearly precludes the chance AT&T Wireless will get bought out without AT&T's consent. With telecoms merging constantly, why short yourself on that route to a capital gain?

Second, think over the coming supply. AT&T is selling shares that represent only about 16% of AT&T Wireless. It plans to distribute to AT&T stockholders some or all of the rest. The timing is uncertain, but eventually you can expect to see plenty of AT&T Wireless shares floating around. Investors also may be asked this year to soak up shares in Verizon Wireless and potentially in SBC-BellSouth's still-unnamed wireless venture. If demand doesn't rise to meet a growing supply of wireless stock, guess what will happen to prices?

Third, think over AT&T Wireless' market position and profitability. With the advent of Verizon and the SBC-BellSouth deal, AT&T Wireless is far from leading the U.S. market in subscribers and revenues (table). "As a result," AT&T's filing notes, "these competitors may be able to offer nationwide services and plans more quickly and more economically." To get where it is now, AT&T had to spend freely. Last year, it paid $367 to win each new subscriber. GTE and Vodafone AirTouch, two-thirds of the Verizon group, spent $269 and $238, respectively. The third part, Bell Atlantic, last year averaged $172 per new subscriber. It expects Verizon's average to run under $200. From $70 million in 1997, AT&T Wireless' operating loss swelled to $666 million in 1999. Verizon hasn't posted a comparable figure, but GTE and Bell Atlantic's combined 1999 wireless operating profit neared $1.4 billion. SBC and BellSouth's topped $1.6 billion.

Fourth, and finally, think about how much a share of AT&T Wireless will cost. The IPO is set to go for $26 to $32 a share. Even at 26, the unit would command a market value of $60 billion, or almost eight times sales. AT&T, eight times bigger by sales, goes for $163 billion. Do you hear that buzz, too? Don't rush to answer.

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