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AT&T rings up TCI deal
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June 24, 1998: 5:16 p.m. ET
Ma Bell's purchase of cable giant to shake Internet, local phone business
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NEW YORK (CNNfn) - Hoping to return to the local telephone market and become a premier Internet player, AT&T Corp. unveiled plans Wednesday to acquire cable giant Tele-Communications Inc. in a blockbuster $48 billion deal.
The stock and debt transaction would give AT&T direct connections to 33 million U.S. homes through TCI's owned and affiliated cable lines - allowing the long distance giant to return to the $100 billion local telephone market.
"Ma Bell" hasn't had any local phone lines since it was broken up more than a decade ago.
"Today we are beginning to answer a big part of the question about how we will provide local service to U.S. consumers," Armstrong said. (352K WAV) or (352K AIFF).
Meanwhile, TCI gets sorely needed cash to pay off billions of dollars in debt accumulated as Chairman and Chief Executive John Malone pursued his vision for a telecom convergence and the 500-channel cable universe.
Industry analysts said the deal is likely to accelerate the long awaited convergence of telephone and cable.
"The cable companies have begun to do trials of telephone service over cable networks," said Robert Wilkes, communications analyst at Brown Brothers Harriman. "I think this acquisition will speed things up. The combination of AT&T's financial muscle and the advent of Internet based telephony will be the two things that will push that along, and I would think you would be seeing Internet telephony over cable systems in the next three years."
ATT's Armstrong & TCI's Malone
Malone was among the few executives forecasting the current flux in telecommunications, where lines between its various segments - Internet, cable television, telephone, video conferencing, data and others - are quickly being blurred.
Dwight Allen, a telecom specialist with Deloitte & Touche Consulting, likened the deal to the recent consolidation frenzy in the financial services sector - where the buzzword is "one-stop shopping." (325K WAV) or (325K AIFF)
Armstrong has been eager to boost the company's Internet presence, with speculation cropping up just last week AT&T had been in talks to buy online service leader America Online Inc. (AOL).
Pairing with a cabler like TCI steps up pressure not only on other phone companies such as the regional Bell operating companies, but Internet Service Providers as well. AT&T WorldNet service is already the largest ISP, with about 1.2 customers.
Benefits, but at a high price
Despite its benefits, the deal - at $48 billion, the fourth-richest of all time - comes at a hefty price. And AT&T may have to spend billions more to continue TCI's effort to equip its one-way cable lines to carry two-way voice and data traffic, analysts said.
As part of the deal -- whose value was a subject of considerable confusion Wednesday -- AT&T will pay about $32 billion for TCI's cable properties, $5.5 billion for other assets such as its stake in the At Home Internet cable venture, and assume $11 billion in debt.
To pay for the deal, AT&T will issue 0.7757 share of common stock for each share of TCI series A stock and 0.8533 share for TCI series B stock.
Based on Tuesday's close, TCI class A is valued at $50.71 per share and TCI class B at $55.78 per share.
Worth the price tag
"It's a premium we think is a very good investment," Armstrong said during a press conference Wednesday and referring to what he said will be a $8.5 billion premium.
"We expect some excellent revenue and cost savings from this and they are going to more than pay back quickly that premium," he said.
The deal, AT&T said, will bring in about $2 billion in synergies over the next three years in both cost savings and revenue gains, despite a unspecified dilution against profits in the near term.
Emphasizing the growth potential of the combined company, executives stressed no layoffs are expected through the merger.
"We need every single employee we've got," said Malone at a New York press conference Wednesday. "This isn't like two big banks getting together and deciding what percentage of the staff they can shoot."
AT&T will also buy Liberty Media Group, TCI's cable programming arm, which will be headed up separately by Malone.
Earnings growth foreseen
Despite recent buyout costs, AT&T said it expects to exceed analyst profit expectations for its second quarter by 8 to 10 cents a share over the current estimates of 80 to 82 cents a share.
AT&T is about to close a $11.3 billion deal, unveiled in January, to buy local phone service provider Teleport Communications Group Inc. from TCI and other cable companies.
Including the costs of that deal, AT&T expects to report 1998 earnings of between $3.35-$3.45 a share, the company said.
The two sides expect to close the deal within the next nine months. The deal, accounted for as a pooling and tax-free to shareholders, also requires regulatory approval.
U.S. Attorney General Janet Reno said Wednesday that the Justice Department will review the buyout proposal.
While analysts seemed upbeat on the long-term prospects of the deal, AT&T stock sank (T) 4-9/16 to 60-13/16. TCI's Class A shares (TCOMA) gained 2-3/4 at 41-7/16 in heavy trading and TCI Class B shares (TCOMB) were up 7-1/2 at 45-5/8.
TCI has enjoyed a recent boon in cable stocks - which have drawn the attention of big Internet players such as Microsoft Corp.'s Bill Gates. TCI's class A and class B shares have shot up over the past year.
Analysts upbeat on surprise deal
Analysts said the buyout, which came after just 10 days negotiating but some 7-1/2 years of informal talks, will help make local-market telephone competition a reality.
The so-called Baby Bells - the regional Bells spun off from AT&T more than a decade ago - have been in a tooth-and-nail battle over the one-time parent's access to local markets.
AT&T, hoping to put into action the Telecommunications Act of 1996, failed on tried and failed on several occasions to launch wide-scale local service, mainly due to high costs and local resistance.
"A combined AT&T and TCI will have the means to constitute a real, true alternative to the local phone monopoly," said Eric Melloul, an analyst at Argus Research. (313K WAV) or (313K AIFF)
TCI's cable lines go straight into homes, an area AT&T had been thwarted from going on its own because local phone monopolies hold the "last mile" of communications traffic from switching stations to homes.
A New AT&T Structure
The deal fuses each company's Internet holdings, AT&T's long-distance and wireless services, and TCI's cable, programming and businesses in a new subsidiary called AT&T Consumer Services.
That unit, to be led by AT&T Vice Chairman and President John Zeglis, will have about $33 billion in yearly sales, nine percent in revenue growth and 90,000 employees.
AT&T Consumer Services is one of three new "tracking stocks" issued to follow each of the three new divisions of the parent.
The two others are its business/wholesale operations and Liberty Media Group.
Deal maker, visionary, board member
One surprise perhaps was that Malone, who began his career 35 years ago at AT&T's Bell Labs, will not hold a titular position at AT&T other than just as a board member.
Malone, who came out of semi retirement last year to get TCI back on the rails, is something of a question mark. TCI was at the altar for a $16.7 billion buyout by Bell Atlantic Corp. in 1993 only to walk away partly over a culture clash.
Cultural differences may not be as likely between Malone and Armstrong.
"It is really heart-warming to see this company [AT&T] not only back on its feet but thriving and led by a man who is such a visionary as Mike Armstrong," Malone said.
With TCI under AT&T's umbrella, Malone will head up the Liberty Media after it merges with TCI's technology unit TCI Ventures.
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