AT&T; to Create ‘Tracking Stocks’ in TCI Deal

Once a staid stock for conservative-spending retirees, T is suddenly flashy.

AT&T; Corp. shareholders are about to become owners of some of Wall Street’s most esoteric securities--�tracking stocks.�

The deal in which AT&T; (ticker symbol: T) plans to acquire cable TV giant Tele-Communications Inc. calls for the long-distance company to issue two of these securities. AT&T;’s current holders will end up with one of them.

Tracking stocks, which have been around for some years and used by such corporate giants as General Motors Corp., are essentially shares that “track� a portion of the overall company’s business.

In effect, they put a market value on a specific part of the company’s business, thus gaining some of the advantages of a spinoff but avoiding the restrictions and tax issues that accompany a full divestiture.

The disadvantage is that, since they typically don’t carry full voting rights and don’t represent a full ownership interest in the company, they often trade at a lower value than they would in a real spinoff.

Tracking stocks are commonly used by big companies with diversified businesses when management feels the market doesn’t give full value to all the subsidiaries within the parent.

They also are a way for a company to attract different types of investors--in AT&T;’s case, aggressive investors interested in growth--without alienating those interested in steady earnings.

AT&T; plans to create three stocks--shares for the parent company, which will be AT&T;’s wholesale and commercial telephone services, a tracking stock for its consumer business and a second tracking stock for TCI’s programming division, Liberty Media Corp.

The wholesale telephone business will most resemble the old company in that it will pay a dividend and be valued on its earnings per share.

The consumer stock will more resemble a high-tech company and be valued more on its cash flow and growth.

This dichotomy will allow the company to capture the most value from what are two very different businesses, analysts said. Investors, in turn, will be able to place their bets accordingly.

The third stock will be issued by AT&T; after the merger, but will go to Liberty Media’s investors--who themselves hold two TCI tracking stocks--not to AT&T; holders.

Liberty Media sells programming to TCI’s cable operations at a discount, and keeping it under the umbrella will probably help solidify that relationship, said Tony Ferrugia, telecommunications analyst at A.G. Edwards in St. Louis.

Ferrugia said the TCI deal could allow AT&T; to bypass local phone companies, thus saving itself large sums and depriving a potential rival of a revenue source.

He said some risk-tolerant investors, who might find the wholesale business too stodgy, might be attracted to the tracking stock based on its potential.

At the same time, the wholesale business, with its steady earnings, would continue to appeal to more risk-averse investors. Thus, “the company can have its cake and eat it too,� he said.

Many details of the deal have not been worked out, including how many of each type of stock current AT&T; holders will receive for their shares.

Also not yet known is how the new shares will be distributed to current holders.