No, you're absolutely right, that's how it's threaded on, you can look through the two holes and see pipe thread. The pipe is indeed steel, I have no idea what the fitting is, it's likely brass but it's so old that it was difficult to cut through with my reciprocating saw, even with a new metal blade.Without being there, it seems like that hat shaped fitting is probably threaded onto the pipe stub coming out of the wall. Got a Dremel (or similar tool) with a cutoff wheel? You may be able to carefully slice through part of it in several places parallel with the pipe coming out, then split it off the pipe. If it's brass, even if the pipe is steel, it should unscrew, but the silicon may be just bonding it to the wall, making that nearly impossible.
Sometimes these 'little' jobs just turn out to be a major pain. My last little job ended up taking a lot of thinking, and nearly three days of try this, try that before I finally overwhelmed it. So, don't feel like you're alone...sometimes, it's just a big PITA!
Once I can get it off, I already have the new parts, I'm going to extend the pipe out and install a new diverter, it's just getting to that point that's the pain in the butt.
Thanks for your help, I'll keep trying to hack parts off of it until it comes loose, unless someone has better ideas.