Ma Bell -- An $80 billion shorting opportunity

[DanS]

Ma Bell is back! AT&T was just bought by SBC, and SBC's name is being changed to AT&T.

Here are the stats. $80 billion market capitalization. Earns about $6 billion a year on revenues of $40 billion. But the voice network is no longer a monopoly, as Voice over IP takes hold.

The math problem is this. What would be the rate of decline in the business necessary to make this stock a shorting opportunity?

[Japher]

I'm not going to assume that they will keep the same buisness model, with them realizing that VIP poises a serious threat.

AT&T also has cable and internet abilities. They will be a company that supplies the "wires".

I think the decline in the company (and the Ma Bell industry in general) will be marked by the rise in wireless communication companies. Less these companies move into those industries more. Though I think Telecomm is more likely to lead the way and rid us of AT&T.

[KrazyHorse]

Assuming you have sufficient collateral in your account anyway to cover the short position, 7.23% per annum

(also assuming that it's a steady decline in profits and that the value of their physical assets is null)

EDIT: 80 does not equal 90

[KrazyHorse]

I'm with Japher on this one. I think that in order to be comfortable with shorting them I'd have to expect declines of ~10-12% p.a. over the next couple of years to guard my position against a changing business model.

[Pyrodrew]

One could buy a put instead.

[KrazyHorse]

The problem with that is that even if he's right about the extent of the decline of Bell's revenue over the next few years the market might not realise it in the next 3 months.

[Japher]

I don't think there is enough on the short term downside to write a put.

I think my money would be best played elsewhere. I may like risk, but this deal is a little too risky for my blood, on either side of the ball.

[Pyrodrew]

Originally posted by KrazyHorse
The problem with that is that even if he's right about the extent of the decline of Bell's revenue over the next few years the market might not realise it in the next 3 months.

A LEAP can last a year (or longer IIRC), which is essentially a long-term option.

[KrazyHorse]

He's going to be paying a hell of a premium for that long an option.

[DanS]

How long do y'all think the voice business will last? This is independent of your analysis of the shorting opportunity, please.

Also, I would be interested in what you have to say about assets to use as proxies for figuring out how much their entire network is worth.

[DanS]

Originally posted by KrazyHorse
Assuming you have sufficient collateral in your account anyway to cover the short position, 6.45% per annum

(also assuming that it's a steady decline in profits and that the value of their physical assets is null)

What interest rate from the brokerage on the short sell are you assuming?

[KrazyHorse]

Anyhow, the fundamental number is the same: what do you need to expect in terms of decay rate of revenue in order to bet against Bell?

The answer is probably going to be similar no matter what instrument you use to do it: 6.45% in the base scenario, 10% to give yourself some real breathing room.

[KrazyHorse]

Originally posted by DanS


What interest rate from the brokerage on the short sell are you assuming?

None.

I was under the impression that unless you're a whale you don't get any rate from the brokerage on short proceeds.

[DanS]

No, I meant what interest rate are you assuming that the brokerage would charge the investor for the short sale.

[KrazyHorse]

Hah. Double cross.