When AT&T reached out and touched the credit markets for $8 billion last week, it meant more than just a single corporation borrowing enough money to bail out Russia. It was an important step in AT&T’s corporate makeover from a dowdy long-distance company to a risk-taking outfit willing to roll the financial dice. Consider this. AT&T began the year with $5.6 billion of long-term debt–and expects to be about $30 billion in hock at year-end. That means the company will have borrowed about $25 billion in a single year–half of it the debt it assumed in its recent purchase of Tele-Communications Inc., most of the rest to finance two big purchases. It’s one thing for AT&T to issue $38 billion of stock to buy TCI. It’s a whole other thing for AT&T to add $25 billion to its debt burden. The difference? You’ve got to repay the debt someday. If AT&T flounders and its stock craters, AT&T doesn’t have to cover stockholders’ losses. But if AT&T can’t make its bond payments, it’s a disaster.
Dan Somers, AT&T’s chief financial officer, asserts that AT&T’s new debt is not only manageable but desirable. Last week’s huge borrowing, he says, “symbolizes AT&T’s transformation from a defensive, slow-to-no-growth company to a fast-growing company that has gone on offense.” If Ma Bell were still around, he added, she’d be “ecstatic” about being so deeply in debt.
That is, if she bought AT&T stock looking for capital gains and has a tolerance for risk. Even though AT&T, with 3.5 million shareholders, remains the country’s most widely held stock, it’s not a staid “widows and orphans” investment anymore. The only widows and orphans who should own AT&T are those with strong stomachs; like all high fliers and would-be high fliers, AT&T is likely to run into air pockets.
In its earlier, more conservative incarnations, AT&T would have sold new stock to help raise the $5.5 billion in cash it paid to buy some noncable assets from TCI and the $5 billion it will soon pay for IBM’s global data network. Instead, it’s borrowing money because selling additional shares would dilute the ownership stake of existing shareholders and presumably hurt AT&T’s stock price. AT&T’s managers are obsessed with the stock price these days because they’re loaded with options and because stock is the currency telecom companies use to try to gobble up the world. The higher your stock price, the higher you can bid.
In one of those wonderful ironies, part of last week’s bond money helped finance stock-market speculation by AT&T. Here’s why. Some $4.7 billion of the $5.5 billion of cash that AT&T paid for TCI’s noncable assets was for stock: a ton of AT&T shares TCI had gotten in an unrelated deal, and TCI’s stake in AtHome, which provides phone and Internet services over cable-TV wires. That $4.7 billion price was based on AT&T’s and AtHome’s stock prices in June, when the deal was struck. When the deal closed on March 9, the market value of the stock AT&T bought was $9.9 billion. So AT&T was more than $5 billion ahead. Yet another example of how stockpicking can be far more lucrative than running a business.
The interesting thing, at least to me, will be to see what happens to AT&T’s cash dividend, currently $1.32 a year, and 88 cents after the stock splits three for two on April 15. High-growth companies typically don’t pay cash dividends–as witness AT&T rivals such as MCI WorldCom and Qwest and Global Crossing. AT&T’s dividend is expensive, sopping up $2.7 billion of after-tax profits. Somers says AT&T has no intention of messing with the dividend and has no need to. But you can bet that if AT&T weren’t afraid of having its headquarters stormed by infuriated small investors who live on dividend checks, the dividend would be gone in an eye blink.
If AT&T were starting out today, it wouldn’t be paying anything like its current dividend. Then again, if it were starting out today, it wouldn’t have the assets and market credibility to be able to borrow $25 billion this year. Proving, once again, that you pay a price for everything you get.
