A Boost to Phone Competition?
Wall Street investors and federal regulators on Wednesday signaled that they expect the proposed merger of the largest long distance company and the dominant cable operator to intensify competition in the telecommunications industry and lead to broader consumer choices.
But the financial market drove down the price of AT&T; Corp. shares amid concerns about the rich price the company had agreed to pay for Tele-Communications Inc. and questions about whether the lumbering phone giant could achieve the deal’s promise.
Announcing the landmark $46.5-billion deal, the largest marriage of cable and phone assets in history, TCI Chairman and cable visionary John Malone declared that the union would eventually have an impact on “every consumer in the U.S. and the world.”
Hyperbole aside, the deal is expected to have far-reaching consequences and sent shock waves Wednesday through the communications and cable industries.
Federal regulators welcomed the the proposed acquisition, hoping it might fulfill the promise of the Telecommunications Act of 1996, which deregulated the two industries. After costly forays by the cable and local phone industries into each other’s business, most companies retreated in failure.
The all-stock transaction, announced in New York by the two companies after only 12 days of concentrated negotiations, would transform the architecture of AT&T;, one of world’s best-known companies. The deal promises to return the company to the local residential business after AT&T; was forced out by a court-ordered breakup 14 years ago.
Shares of local phone companies such as Bell Atlantic, SBC Communications and GTE Corp. dropped sharply because of the threat of new competition as AT&T; uses cable connections into 33 million TCI-affiliated homes to expand into their territories over the next three years. Analysts predicted these companies would raise objections to the union in Washington and pressure regulators to allow them into the long-distance market.
Cable stocks sailed upward as the rich price AT&T; agreed to pay for TCI set a new benchmark in the value of the cable broad-band network for delivering a host of entertainment and information services--including high-speed Internet connections, scores of digital cable channels, telephone and home shopping, and banking over the television set.
“This is the first telecommunications mega-merger that has very clear pro-consumer attributes,” said Brian Adamik of the Yankee Group, a Boston-based research firm.
But Wall Street sent AT&T; shares down $5.38, or 8.2%, to $60 on the New York Stock Exchange. Some critics wondered whether the bureaucratic AT&T; can be a fleet-footed competitor and pull off such a massive, complicated and transforming acquisition.
TCI’s cable systems are considered some of the worst in the industry and will require heavy investments by AT&T; to upgrade.
Many investors were confused by the deal’s complexity, a hallmark of transactions structured by Malone, a shrewd and creative deal-maker. The deal vastly restructures both companies and would result in three separate stock listings.
Despite the efforts of new AT&T; Chairman C. Michael Armstrong to transform AT&T;, many analysts note the company’s history of missteps, including the ill-fated 1991 purchase of NCR Corp., the Dayton, Ohio-based computer company that AT&T; spun off five years later after its value had dropped by $4.1 billion, and a string of unsuccessful buyout offers--for SBC and for Internet service giant America Online.
“I can understand the TCI strategy, but you’ve got to make up this purchase price now,” said Christopher Mines, senior analyst with Forrester Research in Cambridge, Mass. “This kind of conjures up memories of NCR, and worries that they will pay a lot and never make money on it.”
What is more, a similar deal concocted by Malone and Bell Atlantic in 1993 blew up as Washington moved to cap cable rates and Wall Street disapproved of the terms by driving the stock of the phone company lower.
TCI Class A shares rose $1.06 to $39.75 on Nasdaq, after trading as high as $44.
The deal, which must be approved by Washington regulators and shareholders of both companies before it can be consummated in 1999, would create a giant with $56 billion in revenue and the most extensive package of communications services at a time when telephone, cable and computer industries are converging.
Analysts say that AT&T;’s new strength could encourage the Bell regional operators to speed their investments in new technologies to use their copper wires to deliver high-speed access to the Internet. After failed experiments in cable television, all but two of the regional Bell companies have struck alliances with DirecTV to market the satellite television leader’s service.
Under the proposed acquisition, investors will have three ways to participate in the merger.
A new subsidiary, called AT&T; Consumer Services, will be traded as a separate stock that will “track” the company’s residential wireless and long distance telephone, cable television and online Internet businesses. Through TCI and its cable partnerships, the new company will reach roughly 30 million of the nation’s 100 million households. More than 20 million of those households now are customers of TCI or its partners.
The division will also include AT&T;’s 70 million long-distance, 4.5 million wireless, and 1.1 million online customers through its WorldNet service.
Through the existing AT&T; stock, investors can participate in the consumer services business as well as the parent company’s wholesale telephone operation, which provides global communications, outsourcing and systems integration services to more than 15 million business customers worldwide.
The company said the AT&T; shares would be less risky and have a lower debt ratios, more predictable earnings and steady dividends than the new “tracking” stock. Analysts said AT&T;’s stock dropped Wednesday in part because some longtime investors determined it was suddenly too risky.
In addition to the new AT&T; Consumer Services tracking stock, AT&T; plans to issue a tracking stock to the current shareholders of Liberty Media Corp., TCI’s programming arm. Though Liberty will become part of the AT&T; family, it will be controlled by Malone and independently owned. Liberty owns equity in more than 90 services, including the Fox Sports regional channels, Encore, Starz!, Black Entertainment Television, Discovery and QVC. It also owns a passive 9% stake in Time Warner and takes over from its sister TCI Ventures Group the controlling interest in the Primestar satellite television service.
Under the deal, Malone will become AT&T;’s single largest individual shareholder, with a 2% equity stake worth roughly $1.8 billion. He said he is likely to shift some of his holdings into the new AT&T; Consumer Services stock, which he called a “supercharged version of TCI” that would be “the hottest stock in America.”
Malone, the cable industry’s leading technical strategist, will become a director of AT&T; but will not take an executive role.
Sources close to Malone said he would not have gone along with the deal if he had not been able to retain control of Liberty. Some critics suggested that he had preyed on a vulnerable AT&T.; “Malone’s a genius,” said one television executive. “He unloads second-rate cable systems, gets a seat on the AT&T; board, and remains in control of Liberty Media, where he has most of his net worth. He got what he wanted from a desperate AT&T;, which needed to do something bold and dramatic.”
While AT&T; made an overture to TCI in August 1997, Leo Hindery, president of the cable company, said talks went nowhere in part because “we were unattractive as hell.” Hindery, who said initial discussions centered on a marketing alliance rather than an outright sale, said he knew he needed to take quick action to prevent a fire sale. In late 1996, TCI was on the verge of collapse under a weight of debt and subscriber losses to satellite television services.
In the 18 months since joining TCI, Hindery has tripled the company’s stock price and shifted debt to new cable partners, such as Cablevision, Comcast, Time Warner, Media One and Century Cable in Los Angeles. “We just got cuter and cuter,” said Hindery.
The deal is Armstrong’s attempt to use the cache of AT&T;’s name to enter the lucrative local phone market as a hedge against the cutthroat price-cutting and customer-hopping of the long distance market.
“We are merging with TCI not just for what it is, but what we can be together,” said Armstrong.
Both companies expect that bundling services will increase their popularity with customers, expanding their reach while reducing customer churn that is a growing problem for communications companies. One analyst estimated that AT&T; spent nearly $2 billion last year in marketing and promotion to find new customers and keep old ones.
AT&T; has lost millions trying to expand into the $110-billion local phone market by leasing neighborhood wires and other equipment from Baby Bell companies at high rates. AT&T;’s Armstrong was particularly frustrated by the stalemate, and he talked often of finding another way to connect directly to residential customers.
Using TCI’s cable lines, AT&T; plans to bypass the Baby Bells and provide customers packages of long-distance, local and wireless phone service, as well as cable and high-speed Internet access.
“This is what the doctor ordered.” said Anthony Ferrugia, an analyst at A.G. Edwards in St. Louis.
Before AT&T; can make good on its phone service pledge, it has to solve technology problems as well as finance the upgrading of TCI’s far-flung cable network, most of which cannot yet handle two-way signals.
“Despite all of TCI’s chest-pounding about advanced technology, they are the laggard in the cable industry,” said Christopher Mines, senior analyst at Forrester Research in Cambridge, Mass. “AT&T; will have to upgrade the network, and that means billions of bucks and several years, minimum.”
* Q&A;: What can customers expect from AT&T; Corp.’s plan to buy Tele-Communications Inc.? A15
* TECHNOLOGY: The convergence of cable television and the telephone system still faces significant technical hurdles. D1
* ARMSTRONG: AT&T; Chief C. Michael Armstrong, at left, is known as a top-notch strategist with a bold style. D6
* MALONE: Cable mogul John Custer Malone, right, returns home to AT&T; with a role not yet defined. D1
* More coverage on D4, D7
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
The Deal for Consumers
THE MERGER
AT&T;, with 90 million customers, and TCI with 10.5 million households plus an additional 10 million through its affiliates, combine to offer telephone, cable TV and Internet services.
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THE PROMISE
* Ability to add or change phone and cable TV services with point-and-click ease.
* High-speed Internet access over the cable TV network.
* Potentially cheaper telephone service.
* Online banking services via TV set
* Bandwidth on demand would provide the ability to change the speed/capacity of an Internet connection depending on whether you’re sending voice, data or video.
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THE REALITY
* New costs to the customer, such as new cable set-top boxes.
* Costly upgrade of cable network to provide two-way communications and integrate with existing phone network.
* Doubts about reliability of cable and Internet technology compared to the old phone system.
INSIDE: How cable and telephone technolgies come together. Graphic, D5
Source: Staff reports
