AT&T Wireless woes make analysts wary
It may have 22 million subscribers and one of the best-known brand names in telecommunications. But AT&T Wireless Services Inc. also has a rash of problems that should give potential buyers pause before they plunge into a potential bidding war for the nation's third-largest cellphone company, some analysts say.
As it confirmed late last week that it is putting itself up for sale, AT&T Wireless also reported anemic financial results that are raising doubts about whether the Redmond, Wash., carrier is really worth the roughly $35 billion pricetag for potential acquirers, so far reportedly led by Cingular Wireless LLC, the second-largest US carrier. That figure represents a likely premium AT&T Wireless would demand over its $28 billion market capitalization and assumption of about $6 billion in net debt.
"Their momentum is definitely negative at this point," said Christopher J. Foster, a wireless industry analyst with Technology Business Research in Hampton, N.H. "Thirty-five billion dollars just seems like a lot of money to get a company that's unprofitable and isn't showing any signs of having more success in 2004 than they did last year."
Gartner Inc. wireless analyst Philip Redman noted that "if Cingular just gave $1,000 in cash to every AT&T Wireless subscriber to switch to Cingular, they'd save $10 billion. They'd really be taking a gamble that they're going to come out better off from a bidding war."
After nine narrowly profitable months, AT&T Wireless slipped to an unexpected loss of 3 cents per share in the fourth quarter as revenues fell 3.6 percent from the autumn period. Subscriber losses mushroomed as the carrier contended with major breakdowns -- which it said were fixed earlier this month -- in systems used for signing up customers and complying with a new Nov. 24 federal law requiring that wireless subscribers can keep their phone number when switching carriers.
AT&T's reported net gain of 128,000 subscribers for the quarter will likely be by far the weakest performance among the six big national carriers, who also include Verizon Wireless Inc., Cingular, Sprint Corp.'s Sprint PCS unit, Nextel Communications Inc., and T-Mobile USA Inc. AT&T forecast revenues will grow only around 5 percent this year.
Meanwhile, this month's Consumer Reports magazine survey of wireless customer satisfaction in 12 big US markets showed AT&T ranking dead last in Boston and five other US markets, and second to last in four others. And the Federal Communications Commission has reported that AT&T is accounting for half of all consumer complaints about problems with cellular number portability.
"We had a tough fourth quarter," acknowledged AT&T Wireless chief executive John D. Zeglis in a conference call with financial analysts Thursday, adding that it may have been the worst three months for the company since its $10.6 billion initial public stock offering in May 2000, 14 months before the carrier became fully independent of AT&T Corp.
"Over the past four years, going all the way back to our IPO, we've had lots of great quarters to report," Zeglis said. "The fourth quarter of 2003 is not one of them."
But Zeglis said AT&T remains bullish about its future prospects, saying that "the rough spots were virtually all operational" breakdowns that either have been resolved or will be soon, not indications of any fundamental collapse in the business.
One of the key competitive advantages cited by AT&T Wireless is its new wireless data network, called EDGE, which it activated in mid-November. AT&T can claim it is the fastest near-nationwide service of its kind, offering mobile data access at speeds of 100 to 130 kilobits per second, or about three times as fast as a conventional dial-up modem. AT&T said the service is available in areas of the United States that are home to 215 million people.
Industry giant Verizon Wireless said earlier this month it will spend $1 billion over the next 24 months expanding nationally a much faster "Broaband Access" service it now offers in San Diego and Washington, D.C., that can deliver consistent data speeds of 300 to 500 kilobits, with "bursting" up to 2 megabits.
Cingular, which is owned 60-40 by Baby Bells SBC Communications Inc. and BellSouth Corp., has declined to confirm widespread reports it has made an all-cash bid for AT&T Wireless, or to comment on reports in The Wall Street Journal and elsewhere that AT&T's weak fourth quarter has caused SBC and BellSouth to rethink the bid. Other companies reportedly interested in buying AT&T Wireless include Nextel, Japan's NTT DoCoMo -- which already owns a 16 percent stake -- and Vodafone Group PLC, which owns 45 percent of Verizon Wireless but may want to control a big US brand outright. None has confirmed publicly they are pursuing a bid.
Other names floated as possible long-shot bidders include Microsoft Corp., which has been pushing for more business in the wireless arena, and AT&T Corp., which in July 2001 spun off AT&T Wireless, a deal some executives now are said to profoundly regret.
AT&T has picked Merrill Lynch & Co. and Wacthell, Lipton, Rosen & Katz, a New York mergers and acquisitions law firm, to formally review what Zeglis said have been "many approaches" from possible buyers. "We will be thorough, and we won't be rushed," Zeglis said. "The right combination at the right time could lead to significant synergies and enhanced shareholder value."
But Gartner's Redman said buyers should beware.
"There's no question that six carriers in the wireless space is way too many, and the industry needs to consolidate. But it should be smart consolidation, and companies should emerge better from it," Redman said. "It's difficult to understand why there is so much reported interest in AT&T."
Peter J. Howe can be reached at howe@globe.com.
