AT&T; Likely to Restructure TCI Deal to Reduce Shareholder Risk
To protect its existing, risk-averse shareholders from the uncertainties of the residential cable and local telephone businesses, AT&T; is likely to retain little or no economic interest in a new Consumer Services subsidiary formed as part of its proposed $43-billion acquisition of Tele-Communications Inc., according to Leo Hindery, TCI president and designated president of the new group.
AT&T; has yet to disclose details about the capital structure or how much ownership it would retain in a new “tracking stock” it plans to issue to reflect the performance of AT&T; Consumer Services. The new group would sell long-distance, cable, high-speed Internet and local phone service to residential customers.
The restructuring could appease shareholders whose jitters threaten to derail the deal and to force AT&T; to pay one of the steepest break-up penalties ever. The Basking Ridge, N.J.-based phone company has agreed to pay TCI $1.75 billion if it walks away from the deal or fails to win shareholder approval for the merger, according to regulatory filings. By comparison, WorldCom Inc. agreed to pay long-distance provider MCI Communications Corp. a $1.64-billion break-up fee if its pending merger falls through.
The idea behind issuing a new tracking stock is to separate the riskier businesses from AT&T;’s dividend-paying corporate networking group. AT&T; has been among the most widely held stocks in America because of its ability to provide investors with predictable dividend income.
But AT&T; has yet to disclose how existing shareholders would be protected from those risks. Despite Hindery’s expectation, phone company officials maintain that AT&T; would retain a “significant ownership stake” in the tracking stock, meaning shares would reflect the corporate as well as the Consumer Services group. This has led many AT&T; investors to bail out since the deal was announced last Wednesday because of concerns that the cable company’s losses would severely dilute earnings.
“The deal is sucking a lot of wind,” Hindery said. “We underestimated the market reaction.”
As a result, AT&T; has held an unprecedented number of conference calls with analysts and the press in recent days in an attempt to correct misinformation and ease investor fears.
Yet the stock has continued to tumble, falling nearly 16% on the New York Stock Exchange in the last week, to $54.88 on Thursday. That is the lowest price since the arrival in November of new Chairman C. Michael Armstrong. The stock hit a 52-week high of $68.50 in March and was trading above $65 the day before the deal was announced.
The stock dropped $1.88 on Thursday alone because of new worries about the cost of converting TCI’s one-way cable network into a two-way system capable of delivering local phone service.
AT&T; says it expects about 30% of TCI’s customers to sign up for the service. “This will be spend as you go and will be accompanied by new revenue streams from the start as well,” AT&T; spokeswoman Eileen Connolly said.
David Nagel, AT&T;’s chief technology officer, elaborated on the anticipated costs of those upgrades Wednesday, suggesting the phone company would invest an additional $4.7 billion to equip 30% of TCI’s 17 million subscribers for telephone service and maintain the network. That is in addition to the $500 million TCI would spend before the deal closes.
AT&T; says it is unlikely that all of its customers would sign up. But customer turnover could mean continuous investments in upgrades. Equipping the remaining 70% of TCI’s customers would cost an additional $6.5 billion.
But the cost of the upgrades will be moot if the partners don’t agree on the structure of the deal. TCI executives seem especially frustrated with AT&T;’s delay in announcing the details of the new tracking stock.
“The mistake we made is in not getting out the details of the tracker,” Hindery said. “It’s quite possible that the old T stock will be a tracker of just the network and business services company and that the economic interests in the new tracker would be spun off to a new group of shareholders.”
He said that could mark a “defining catharsis” allowing AT&T; to move into the modern and riskier high-tech era without alienating the traditional holders of its stock, which is known on Wall Street by its stock symbol, T.
