Let freedom ring

AT&T gives Malone his Liberty AT&T's decision to spin off Liberty Media was more notable for what it did not accomplish: It did not ease the long-distance carrier's debt burden nor did it immediately clear up the regulatory cloud surrounding AT&T's pending merger with MediaOne. But it did relieve AT&T of a minor headache, and it possibly gave the company some negotiating leverage with Time Warner.

In the end, AT&T cut ties with Liberty Media because Liberty Media's original attraction as part of the TCI acquisition had faded as AT&T's cable empire dreams collapsed. A tracking stock to AT&T and a holding company that owns stakes in video programming assets such as USA Networks, News Corp., QVC, and E! Entertainment Television, Liberty Media was never operationally integrated into its other properties. Its chairman, John Malone, became a thorn in the side of CEO C. Michael Armstrong as AT&T's stock dropped to record lows. And Wall Street didn't seem to care about the Liberty Media property.

"I don't think AT&T was ever given a lot of equity value for owning Liberty and had to concede the point that it didn't make much sense anymore," said David Brenner, analyst at Ladenburg Thalmann & Co.

AT&T only said the spinoff was consistent with the company's recent decision to restructure into four companies and that it might help Liberty Media pursue deals.

The benefits to being an asset-backed security and a fully independent company would include "administrative simplicity," less possibility for conflicts of interest with AT&T and "reduced regulatory overhang," said Liberty Media President and CEO Robert Bennett. In particular, Liberty Media has been hamstrung in structuring investments because its ties to AT&T subject it to the FCC's complex broadcast ownership restrictions, Bennett said.

"Malone will still be on the board and will still have some influence over AT&T, but now he can go off and invest with [Rupert] Murdoch and Sky Global Networks," said Patrick Comack, analyst at Guzman & Co. Sky Global could become AT&T's fierce rivals in the fight to deliver broadband services to consumers.

For AT&T, the gains are more subtle. The spinoff does not reduce the carrier's $61.7 billion debt load, and it could even cost AT&T up to $2 billion. That's because the tax-sharing agreement with Liberty Media calls for AT&T to reimburse Liberty Media for the value of net operating losses that have been passed onto AT&T, Bennett said.

Last week, Armstrong said AT&T planned to sell $4 billion of assets by the end of 2000 as part of an effort to shrink its debt. Although AT&T presumably has plenty of cash flow to cover its estimated $3.5 billion in interest expenses, rating agencies have downgraded the company as a credit risk because of uncertainty regarding AT&T's debt distribution to its four offshoots.

Following the lead of Fitch and Standard & Poor's, Moody's Investors Service lowered its credit ratings on AT&T's long-term debt by one notch, from "A1," its second-highest ranking, to "A2." The action reflects the AT&T's "escalating" debt levels and the rapid price deterioration in AT&T's core business - voice telephony, Moody's said.

According to Comack's calculations, AT&T possesses about $30 billion in assets that it could sell. These include a $13.5 billion stake in Time Warner Entertainment, a $4 billion stake in Cablevision Systems, $7 billion worth of Vodafone AirTouch stock and other international assets.

In theory, by spinning off Liberty Media in mid-2001, AT&T will have gone a long way toward satisfying one of the choices the FCC presented for approval of the $50 billion purchase of MediaOne. That option called for AT&T to jettison programming interests, including Liberty Media Group, that sell to Time Warner's cable systems. But an AT&T spokeswoman said the Liberty Media announcement does not signal the option it is going to use to win the FCC's approval.

In fact, one of the other conditions proposed by the FCC - selling off MediaOne's 25% interest in TWE, a subsidiary that owns most of Time Warner's cable systems, as well as HBO and Warner Bros. movie studios - still seems a strong possibility.

"We've said before we would like to get out of the TWE partnership in a way that assures shareowners fair treatment and fair valuation," the AT&T spokeswoman said.

AT&T wouldn't comment further on any possible debt-paring measures. "We're looking to cut our debt, and we said before that we're looking at nonstrategic assets," said an AT&T spokeswoman. "We're not going to speculate on what [assets] are attached to those numbers."