Is AT&T Hearing Takeover Artists' Steps?
By Allan Sloan
Tuesday, July 27, 2004; Page E03
It's come to this: AT&T, once the mightiest company on earth, the firm that reached out and touched almost every American household, is not only giving up on attracting new residential customers -- but it's almost certain to be targeted by a group of takeover artists. I've learned that several former high-ranking AT&T executives who left the firm after disagreements with the current management are working with Kohlberg, Kravis, Roberts & Co., a New York leveraged-buyout house. It's not clear what their KKR gig consists of -- KKR declined to comment -- but it's hard to imagine that the topic of AT&T never arises. And, my sources say, within the past year KKR and at least one other private-equity firm have approached AT&T about buying the company. AT&T declined to comment on any aspect of this article.
Being taken over by a financial operator like KKR would mark the final fall of the company once known as Ma Bell, which during its days as the nation's telephone monopoly had the greatest revenue, profits and stock-market value of any company on earth. Despite this rich history, AT&T is chump change these days as far as Wall Street is concerned -- which is why it's vulnerable. Some 204 of the companies in the Standard & Poor's 500-stock index had stock-market values greater than AT&T's as of Friday, according to Aronson+Johnson+Ortiz, a Philadelphia money-management firm. The market valued AT&T's stock at a mere $11 billion. To put that number into context: It's about one-third the size of the special cash dividend Microsoft declared last week.
"We can count," chief executive David Dorman said Thursday, explaining why AT&T will stop promoting its still-lucrative residential long-distance business, which dates back almost a century. But AT&T's numbers are a screaming invitation for a leveraged-buyout house -- an outfit that does takeovers involving lots of borrowed money -- to take a run at AT&T. The company is a tempting target for a private buyer because it generates tons of cash from its operations -- but is relatively light when it comes to reported profits. Private buyers care about making money, not about showing smoothly rising earnings the way that publicly traded companies like to do.
AT&T's profits are in free fall -- second-quarter earnings, announced last week, were down 80 percent from 2003's. But the takeover math -- not to be confused with Wall Street's stock-valuation math -- is rather simple. AT&T's stock closed Friday at $14.02 a share. AT&T says its free cash flow -- the difference between the cash it takes in and the cash it pays out for expenses and to maintain and upgrade its facilities -- currently runs about $5 a share. It will rise to at least $5.25 because of the spending cuts announced last week. Now watch this. Say someone would lend you $15 a share to buy AT&T. Even though the company's revenue and cash flow are shrinking rapidly, you'd be able to pay off the loan in four or five years, and then find yourself rolling in dough. (Of course, real-life math isn't quite that simple -- but you get the idea.)
If you do the obvious short-termy things to boost income from consumers -- raising prices, adding fees, cutting back on service -- you'd have even more money to play with, at least until the customers leave. Meanwhile, you could concentrate on AT&T's lucrative business market, which accounts for about three-quarters of its cash flow.
The decision last week to concentrate on business services and let the consumer operation fend for itself is the plan formulated by Dorman, who became chief executive two years ago. Back then, Dorman decided AT&T should be all things to all telecom customers by offering packages that combined its long-distance service with wireless, broadband and local phone service purchased from other companies and resold under the AT&T name. But numbers -- and regulatory reverses -- intervened. Dorman's new strategy, ironically, seems to be the one urged on him by some of the people now advising KKR -- but that he rejected at the time. You'd almost think that Dorman is hearing the footsteps of takeover artists and is trying to beat them to the punch by jettisoning marginal businesses and cutting costs.
It's not clear if the ex-AT&T execs working with KKR would be violating their noncompete agreements with AT&T if they worked on projects involving their former company. But it wouldn't surprise me to discover that Dorman, who came close to selling the company to BellSouth this year, was shopping it again. If that happens, KKR and other private-equity firms are the natural buyers.
The thought of it boggles the mind. Once upon a time, there was Ma Bell, which bestrode the earth like a corporate colossus. Now, the likes of Henry Kravis are eying it. Perhaps someday soon Kravis's friends will have a new nickname for him: Pa Bell.
Sloan is Newsweek's Wall Street editor. His e-mail address is firstname.lastname@example.org.
© 2004 The Washington Post Company