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A reader wrote in today and asked what effect the AWE semi-spin-off would have on AT&T's earnings. Good question. At the moment, AWE is losing money as it builds out its wireless infrastructure, so the question is how the divestiture will affect AT&T's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> future earnings.
If you expect that wireless communications will be big (you have been paying attention to the people around you, haven't you?), you would have to say that the net long-term effect would be to lower them, but that's not a bad thing for AT&T shareholders. After all, the IPO put a staggering $10 billion into AT&T's coffers. Shareholders exchanged their "economic interest" in AWE for some pretty heavy dollars.
In general, spinoffs and tracking stock sales are managed to the benefit of the parent company's stock holders. The stockholders have to approve the plan in advance, remember. Often the reason for dividing a company is to "unlock" hidden value. In the case of AT&T and AWE, the point is to emphasize that AT&T is a major player in the wireless industry and to assign a market value to the part of the company that is in that business. Each situation is unique, and certainly it is possible to mis-manage a spinoff, but the plan is always to increase shareholder value.
In the case of the AWE sale, AT&T is retaining over 80% ownership of AWE, although it has announced that it intends to eventually sell it all off. It looks to me like they are proceeding cautiously, which is wise. Dumping too many shares of stock on the market at one time would likely drive the price down. As it is, they have established a market value for the stock, and if the price goes up, they can consider selling the next batch at a higher price.
The AT&T board of directors is considering a number of options besides simply selling more tracking stock, though, including an exchange of AWE stock for AT&T stock much like the General Motors <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GM)") else Response.Write("(NYSE: GM)") end if %> and Hughes <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GMH)") else Response.Write("(NYSE: GMH)") end if %> tracking stock exchange that is underway right now.
Apparently the official offers from GM were hitting the mailboxes last week. I've gotten several recent queries about the GM-Hughes offer. If shareholders do nothing, they will end up with all GM stock. To take advantage of the offer, one has to decide to convert some GM shares into GM-Hughes tracking stock. If you are holding GM and are considering taking advantage of the offer, you might want to read the February 3 Foolish Four Portfolio Report.
In that article, I weaseled out of any strong recommendations one way or another, but I did try to explain what a tracking stock is, the terms of the exchange, and the options available to investors. (The GM stock in our Foolish Four portfolio will not be exchanged for GM-H.) That article may also be of interest to AT&T stock holders because of the parallels between it and the AWE situation.
Procter & Gamble Still Sliding
Have you noticed that Procter & Gamble <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PG)") else Response.Write("(NYSE: PG)") end if %> has moved into our Top 10 Dow stocks list recently? The company is selling for about half of its all-time high due to falling earnings last quarter and expectations that earnings will be weak in the near future. The steep drop was precipitated by an earnings warning March 7. Earnings were down 11% compared with the same quarter last year.
I don't think P&G has ever actually made the Foolish Four list even briefly, but I sure hope it does. That could prove to be a great opportunity to buy a truly global powerhouse, for those who don't see this as the beginning of a long slide into oblivion for the company. Kidding. Sort of. One of the constants in my e-mail are the notes asking me why I am "recommending" this or that dog of a stock.
The answer is always the same: The Foolish Four is a contrarian, value-based strategy. It's based on the premise that you can beat the market over the long term by buying blue chip companies that are out of favor and holding them until they turn around. It's not perfect and there is a large element of luck that governs short-term returns, but it's a sound premise that has performed well in the past, and I believe is likely to perform well in the future -- especially if the tech stocks lose their luster (it's a pretty deep shine, though, that's for sure)!
Tune in tomorrow for more on recent earnings reports from Foolish Four and past/potential Foolish Four companies. We'll have a numbers feast.
Fool on and prosper!