Lightening the load

All told, last week's cash sales by AT&T totaled about $4.56 billion, and proceeds will go toward reducing AT&T's debt.

With a whopping $46 billion debt, AT&T last week announced the sale of what it terms “non-strategic assets” in a move to bolster its balance sheet.

Reducing its debt is one of the biggest challenges facing the carrier as it moves to split into four separate entities — broadband, wireless, business and consumer — based on the notion that the parts are worth more than the whole (Telephony, Oct. 30, 2000, page 8). Many Wall Street analysts want AT&T to cut $25 billion from its year-end 2000 debt of about $65 billion.

The selling spree started when AT&T Broadband announced the sale of certain cable systems in Georgia, Illinois, Iowa and Missouri for about $2.2 billion in cash to Mediacom Communications.

The deal fits the company's strategy of operating cable systems clustered in major markets, said Eileen Connolly, vice president of financial communications for AT&T. Clustering is the gathering of cable assets into a company's major markets.

The sale is a plus for Mediacom, which has been looking to expand its markets. The deal positions the company as the No. 8 U.S. cable operator — increasing its subscriber base from 840,000 to about 1.6 million. Previously, Mediacom was the No. 9 cable company in the U.S.

“Through our own interconnection — our own fiber networks — we'll be able to build a network that will be able to transport data, IP telephony or digital products,” said John Pascarelli, senior vice president of marketing and consumer services at Mediacom.

In a separate deal, AT&T Broadband agreed to sell a portion of its cable network to Charter Communications — the fourth-largest cable operator in the U.S. in terms of customers — for about $1 billion cash, $500 million in stock, and cable systems in Miami Beach and Sebastian, Fla., valued at $249 million. The portion that Charter is selling currently serves 62,000 customers.

The sale provides Charter with cable systems in the St. Louis area; Auburn, Birmingham, Montgomery and Selma, Ala.; and the Reno area of Nevada and California.

Charter has wanted to purchase these cable systems since December 2000.

Must cut $65 billion debt

Monetize debt with Microsoft and Comcast stock	$4 billion
Other monetization	$4.7 billion
NTT DoCoMo investment	$9.8 billion
Sale of Japan Telecom interest	$1.35 billion
Sale of cable assets to Charter and Mediacom	$3.2 billion
	$23.05 billion
Only about $40 billion left!
Note: Values are estimated Source: AT&T

“This deal isn't a surprise to anybody,” said Mary Jo Moehle, director of investor relations at Charter. “We've been open about our acquisition strategy for some time. We'll be able to integrate these [cable] systems and reduce the number of headends in those markets.”

The Mediacom and Charter transactions are expected to close by second or third quarter 2001. Proceeds from both deals will help lower AT&T's debt.

In addition to divesting itself of cable assets, AT&T has also agreed to sell its holdings in Japan Telecom to Vodafone Group.

The sale, which will increase Vodafone's stake in Japan Telecom to 25%, was largely motivated by J-Phone, Japan Telecom's mobile offering.

“We are keen on making J-Phone a force to be reckoned with in the Japanese market,” said a Vodafone spokesman.

The deal represents a significant return on investment for AT&T, which spent about $612 million for its equity in Japan Telecom, the country's third-largest operator mobile service. Scheduled to close next month, the all-cash transaction is valued at $1.35 billion and should net about $1 billion. The proceeds will be split evenly between AT&T and AT&T Wireless, each of which hold 5% of Japan Telecom. The entire net will be used to retire debt, said an AT&T spokeswoman.

AT&T's investment in Japan Telecom, made in August 1999, occurred in conjunction with a similar investment from BT. The two companies' stakes established Japan Telecom as a partner of Concert, the AT&T/BT joint venture that markets communications services to multinational corporations.

Recently, AT&T's relationships with Japanese carriers have changed significantly. Most notable is the $9.8 billion investment that NTT DoCoMo made in AT&T upon establishing a relationship with AT&T Wireless. This investment will transform into a 16% interest of AT&T Wireless when its spinoff is complete.

As part of DoCoMo's investment, AT&T Wireless was required to divest its 5% of Japan Telecom. AT&T's current debt level, however, led it to sell all its Japan Telecom holdings.

According to an AT&T spokeswoman, the divestiture will not affect Concert's relationship with Japan Telecom. All told, last week's cash sales by AT&T totaled about $4.56 billion, and proceeds will go toward reducing AT&T's debt. This cash infusion could be increased with the sale of the carrier's 25.5% stake in Time Warner Entertainment, potentially one of AT&T's largest debt-reduction vehicles.

The sale, however, is mandated by the FCC. In December 2000, the commission — believing that AT&T did not commit to a course of action regarding regulations imposed through its MediaOne Group acquisition — ordered the sale of AT&T's TWE holding by May 19. This has compromised AT&T's position at the bargaining table, with AT&T asking for $15 billion and AOL Time Warner offering about $10 billion, analysts say.

“AOL's in a rush to buy [TWE], and they have the leverage,” said Patrick Comack, telecom analyst at Guzman & Co. “And they're saying not only do they want to buy it on the cheap, but we want some amenities.”

Making the situation even more difficult for AT&T is the fact that AOL Time Warner is the only potential suitor to have stepped forward, said Scott Cleland, CEO of Precursor Group.

“There aren't many people who have $10 billion to $15 billion in spending money to buy a non-controlling interest in a cable company,” he said.

With negotiations stalled, however, AT&T last week took advantage of a piece of leverage inherited through its acquisition of MediaOne by formally requesting AOL/Time Warner to restructure TWE from a partnership to a corporation with securities. This move will allow AT&T to sell its stake in TWE as a stock offering.

“If there's not another corporation that would really want to buy, then sell it to the public and let Time Warner deal with all the issues of dealing with the public. Not a bad strategy,” said Gary Jacobi, director of wireline equity research at Deutsche Banc Alex Brown.

The move might intensify the negotiations with AT&T and AOL Time Warner agreeing to suspend action surrounding the changes in TWE's corporate structure until March 15.

If AT&T does sell its stake in TWE somewhere between $10 billion and $15 billion, the company's debt will be reduced between the upper $20 billions and lower $30 billions. According to an AT&T spokeswoman, even more debt reduction is on the horizon.

“We're planning on using proceeds from the broadband IPO later on this fall to pay down the debt [and,] earlier this month, AT&T announced we're retaining up to $3 billion of AT&T wireless stock for disposition after the date of split-off, expected in mid-2001, to further reduce debt.”