Shot in Arm to Competition?
The $46.5-billion megamerger announced Wednesday by long-distance powerhouse AT&T; Corp. and cable giant Tele-Communications Inc. is expected to bring to the telecommunications industry the intensified competition and basket of consumer choices that Congress promised two years ago when it deregulated the phone and cable industries.
Announcing the deal in New York, 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.”
While Malone’s statement might be an overstatement, the deal will have far-reaching consequences and sent shock waves Wednesday through the communications and cable industries.
The all-stock transaction, which was announced by the two companies after only 12 days of concentrated negotiations, would transform the architecture of AT&T;, one of the world’s best known companies whose stock is widely held. The world’s largest long-distance company, AT&T; was forced out of the local telephone business by court-ordered break-up 14 years ago; this deal promises to bring the company back into the local residential business.
Shares of local phone companies such as SBC Corp. (parent of Pacific Bell), Bell Atlantic and GTE Corp. dropped 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.
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 broadband networks 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 megamerger that has very clear pro-consumer attributes,” said Brian Adamik of the Yankee Group, a Boston-based research firm.
Wall Streets initial reaction to the deal was skepticism and traders sent AT&T; shares down $5.38, or 8.2%, to $60 on the New York Stock Exchange.
Some critics wondered whether the stodgy and bureaucratic AT&T; can be a fleet-footed competitor in a new array of high-tech businesses and pull off such a massive, complicated and transforming acquisition. Wall Street drove down shares because of the uncertainties surrounding the structure of the transaction, the risks of its new strategy and the dilutive effect of the money-losing cable company on AT&T;’s earnings.
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 revenues and the most extensive package of communications services at a time when telephone, cable and computer industries are converging. The potential is huge for companies that can offer such services as new technologies allow more data to be sent ever faster through cable, satellite and telephone systems.
Analysts said the deal, if approved, eventually could push Washington to relax rules banning local phone companies into the long-distance business, and 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.
Despite two-year old deregulation of the telecommunications industry, competition has yet to lower cable and local phone rates. Most local phone companies retreated from forays into the cable television business because of the unexpectedly high costs of entry. Cable companies confronted technical difficulties in equipping their systems for delivering phone service.
Under the complex deal proposed by the two companies, investors will have two ways to participate in the merged corporation. A new subsidiary, called AT&T; Consumer Services, will be spun out 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, of which 20 million are now paying customers of the Englewood, Colo.-based cable giant.
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.
The existing AT&T; stock will focus on global communications, outsourcing and systems integration services the company provides to more than 15 million business customers worldwide. It will be a less-risky investment because of its lower debt ratios, more predictable earnings and steady dividends.
Analysts said AT&T;’s stock dropped Wednesday in part as some long-time investors of the stock, one of the most widely held in America, determined it was suddenly too risky.
TCI Chairman Malone, who has a reputation for enriching himself and his shareholders through schrewd and creative deal-making, 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” and predicted 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 Media Corp., the cable programming arm of TCI that 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.
Though Liberty will become part of the AT&T; family, it will be independently owned and controlled and remain publicly traded as a “tracking” stock similar to the new AT&T; Consumer Services group.
The purchase is part of an intensive effort by new AT&T; Chief Executive C. Michael Armstrong to use the cache of AT&T;’s name to enter the lucrative local phone market as a hedge against the cut-throat 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 customer base, while reducing the 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. Without its own lines, AT&T; and other rivals at first leased neighborhood wires and other equipment from Baby Bell companies. 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.
But there is room for doubt.
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.”
TCI planned to spend $1.8 billion over the next three years to prepare its facilities for telephone and high-speed Internet delivery. AT&T; plans to accelerate those plans by 20% to 30%.
