AT&T; Offers $58 Billion for MediaOne

AT&T; on Thursday proposed the biggest merger in cable television history, bidding $58 billion in cash and stock for MediaOne Group in a move that throws a wrench into MediaOne’s existing agreement to be taken over by Comcast Corp.

The deal would make the nation’s largest phone company also its largest cable system operator, a coast-to-coast behemoth with access to 26.5 million households, including 815,000 subscribers in Southern California.

Perhaps more important, the merger would significantly strengthen the presence of AT&T;, a telecommunications icon, in the emerging market for “broadband” communications--the high-speed delivery of Internet, on-demand video and other digital services to homes and offices. It also may make AT&T; a more effective competitor of local phone companies, potentially driving down prices for consumers. Ironically, it was the 1984 breakup of AT&T;’s local phone monopoly that created today’s welter of independent local and long-distance phone companies.

The audacious bid came on a day dominated by multibillion-dollar telecommunications deals. Deutsche Telekom and Telecom Italia announced an $82-billion plan to merge into the world’s second-largest telecom company. Meanwhile, Cox Communications--which itself had once explored bidding for MediaOne--agreed to buy the cable company Media General for $1.4 billion in cash.

AT&T;’s offer was the most eye-catching because of its potential to transform the one-time telephone monopoly into a dominant player in the rapidly growing communications and data world. AT&T;’s goal is to reach roughly 60% of the nation’s households with phone, video and data services within the next three to five years.

“Together, AT&T; and MediaOne will bring broadband video, voice and data services to more communities, more quickly than we could separately or, in MediaOne’s case, with any other company,” AT&T; Chairman and Chief Executive C. Michael Armstrong said in a letter delivered Thursday to MediaOne’s board.

AT&T; now serves roughly 11 million cable customers directly and owns an interest in cable partnerships serving another 11 million subscribers. Directly or indirectly, its cable wires pass by--or are available to--35 million homes, roughly 35% of the nation’s households.

Telecommunications industry observers said Thursday that the AT&T-MediaOne; merger will probably be only one of many deals in cable and communications, as major players--including cable, long-distance, and local telephone companies--scramble to secure ownership of data-ready communications networks in an era of government deregulation.

Cable television lines are the preferred quarry for the simple reason that they have far larger capacity than telephone lines. That’s a crucial consideration in bringing high-speed, two-way voice, data and video streams into the home and office.

“It’s been clear for a while that AT&T; is intent on bypassing the Baby Bells and extending its reach into as many homes as it can,” said Christopher Mines, a telecommunications analyst for Boston-based Forrester Research.

To that end, AT&T; has completed or proposed $70 billion in deals since Armstrong became chairman and CEO in October 1997, including the $11.3-billion acquisition of Teleport Communications, this year’s purchase of Tele-Communications Inc., or TCI, for $44 billion, and the $5-billion purchase of IBM’s global communications system.

In a conference call Thursday, however, Armstrong said the MediaOne acquisition would be the last major cable acquisition AT&T; needs for its strategy of using cable lines to bring a wide array of voice and data services to millions of customers.

Neither Comcast nor MediaOne had comment Thursday on AT&T;’s bid. However, US West, the local phone company that spun off MediaOne in 1998, demanded that the deal be closely scrutinized by state and federal regulators and denounced it as “a blatant attempt by AT&T; to rebuild its monopoly--and to do it on the backs of American consumers.”

Adding to the high-finance drama of Thursday’s announcement was the involvement on AT&T;’s side of Amos B. Hostetter, a cable pioneer who sold his Continental Cable to MediaOne in 1997, becoming MediaOne’s largest shareholder.

Hostetter left the company, however, in conflicts with the management of MediaOne. Since Hostetter’s non-compete agreement expired in August, rumors have circulated that he would make a bid for MediaOne.

Hostetter would become non-executive chairman of AT&T;’s broadband and Internet services unit and a member of the AT&T; board upon completion of the merger, AT&T; said. The unit, however, would remain under the management of Leo Hindery Jr., former president of TCI.

Hostetter declined to comment on the AT&T; offer, but in a document he filed Thursday with the Securities and Exchange Commission, he said he expressed strong opposition to the Comcast-MediaOne deal within three days of its announcement. In part, Hostetter, who controls an estimated 15% of MediaOne, said he objected to Comcast’s use of nonvoting stock in the transaction that would allow the Roberts family, which controls Comcast, to retain more than 80% of the voting power of the combined company despite owning less than 1% of its equity.

Hostetter asked for and received a waiver of a 10-year standstill agreement with MediaOne that prevented him from bidding for the company or aiding another party. He immediately entered talks with AT&T; and reached agreement on Wednesday to vote for this deal.

AT&T;’s offer, which amounts to $85 per MediaOne share, appeared on its face to handily outstrip Comcast’s proposed $54.5-billion deal (based on Thursday’s closing stock prices). Moreover, AT&T; said it was prepared to pay one-third of the total in cash and to sweeten its terms by up to $3.5 billion if its stock declines by as much as 10% before the deal closes. AT&T; would also pay a $1.5-billion penalty to Comcast for breaking up its deal.

Under the offer, MediaOne shareholders would receive $30.85 in cash plus 0.95 AT&T; shares for each of theirs. AT&T; stock closed at $56.75 on Thursday, down 25 cents, while MediaOne finished at $69.50, up $2.56. Both trade on the New York Stock Exchange. The offer was announced after the market closed.

AT&T; executives noted that its shares carried full voting rights.

Institutional investors were hard-pressed to see how Comcast could mount an effective counterbid.

“They’ll have a hard time because they don’t have the cash,” said a large Comcast shareholder. “The cash is key.”

The size of the offer caused gasps among industry observers.

Under the deal, AT&T; would take control of MediaOne’s 5 million cable customers and its 25% interest in a partnership with Time Warner Inc. that encompasses the Warner Bros. film studio, Home Box Office, and cable systems that serve 10 million subscribers.

Nearly a third of MediaOne’s assets are in wireless and international assets that AT&T; said it would sell. These include One-2-One, a British wireless communications company, a stake in AirTouch Communications, and Telewest, a British cable company.

Analysts said AT&T;’s price for MediaOne is breathtakingly steep on a per-subscriber basis--roughly $4,910 per customer, compared with the $2,950 it paid for each of TCI’s customers.

Armstrong said, however, the higher price was justified by the advanced shape of MediaOne’s cable plant and the geographic concentration of its subscribers in major cities.

AT&T;’s existing cable unit, TCI, is well behind the rest of the industry in upgrading its network to carry two-way communications. Of the company’s 11 million direct subscribers, no more than 31% are served by upgraded lines. That ratio has seriously hampered the growth of its @Home high-speed Internet service partnership, although AT&T; has publicly committed $3 billion during the next three years to bring the figure to more than 70%.

By contrast, MediaOne has been a technological trendsetter: Of its 5 million subscribers, about 70% are served by rebuilt and upgraded lines.

While federal rules prohibit cable operators from owning systems that reach more than 30% of U.S. households, they are under review and therefore should not present an obstacle to approval, according to Armstrong.

* CEO’S GRAND DESIGN

The Internet appears to be the end game for AT&T.; C1