AT&T;’s Bid Hurts Stock but Boosts Cable Firms
AT&T; Corp.’s $53.9-billion bid for MediaOne Group Inc. drove cable values higher on Wall Street on Friday while knocking nearly $20 billion of value out of the $167-billion phone giant, as investors worried about the proposed acquisition’s potential damage to earnings.
Presidential hopeful Sen. John McCain (R-Ariz.) said the bid, which would give AT&T; direct and indirect influence over cable systems that can service 62% of the nation’s households, is just the sort of scenario that led him to vote against the deregulation of telecommunications in 1996.
Consumer advocates promised to try to block the acquisition, claiming it would be bad for consumers and give AT&T; too much clout in the telecommunications business, coming on the heels of its March purchase of cable leader Tele-Communications Inc.
AT&T; envisions offering a bundle of broadband services, from high-speed access to the Internet to telephone and television, over cable wires. In addition to the two cable acquisitions, it is forming joint ventures with cable operators to deliver local phone service in competition with the regional Bell companies.
“AT&T; is trying to combine the cable industry under one consortium that they claim will bring competition to the local phone business, but that will slow down competition in cable,” said Gene Kimmelman of Consumers Union, a Washington consumer group. “This could also crush any independent high-speed distribution for Internet service providers.”
The proposed marriage could also fuel a movement by Internet service providers, led by America Online, to gain access to high-speed cable lines used by Internet service providers @Home Corp. and Road Runner, a joint venture between Time Warner Inc. and MediaOne.
Cable industry executives, meanwhile, doubted that Comcast Corp. would raise its March offer of $49 billion for MediaOne without the help of one or more partners. MediaOne, the only mid-size cable company not family-controlled, with 5 million customers in choice markets, is Comcast’s best hope for climbing into the top rank of cable firms.
As a result, some analysts predicted that Comcast might seek to interest other cable operators in a counter-bid that would split up MediaOne. Several companies, including Cox Communications Inc. and Paul Allen-controlled Charter Communications Inc., have eyed MediaOne as a way to bulk up and justify the huge investments required to deliver new services in the fast-consolidating cable business.
Comcast could also call on its largest outside shareholder, Microsoft Corp., which invested $1 billion in the Philadelphia-based cable company in a bid to speed up the deployment of high-speed cable modems that make it faster and easier to surf the Internet.
Comcast’s initial bid now appears deficient in two ways. AT&T;’s bid is one-third cash, while Comcast offered no cash. To buy a company double its size, Comcast proposed using entirely nonvoting shares, allowing the Roberts family to retain control after the merger even as the family’s equity stake dropped to slightly more than 1%. The equity portion of AT&T;’s bid is for voting shares.
The phone company’s plan to issue new stock to buy MediaOne led to a nearly 6% drop in its stock Friday on the New York Stock Exchange, a day after its surprise offer. Shares of New York-based AT&T; fell $3.38 to close at $53.38; Englewood, Colo.-based MediaOne shot up 11% to $77.38. A MediaOne purchase would cut AT&T;’s earnings by as much as 16% this year.
The promise Thursday by AT&T; Chairman C. Michael Armstrong to cut costs by $2 billion by the end of the year to offset the dilution in earnings helped prop up the stock.
That the stock price didn’t drop nearly as much as the expected bite out of earnings was viewed as a positive sign by many investors. Analysts also noted that the stock’s slide was not as steep as the one after AT&T;’s agreement to buy TCI for $44 billion.
“Considering the size of the offer, this decline is not surprising,” said Mark Greenberg, a fund manager at Investco, a Denver investment firm whose second-largest holding is MediaOne.
He predicted that the stock would recover as it did after Wall Street got comfortable with the TCI acquisition.
Some analysts questioned whether AT&T; would be able to integrate the back-to-back cable purchases and whether the strategy would even work. While a few cable companies are already offering phone and Internet services in select markets, none has undertaken any large-scale roll-outs, while the largest operator, Time Warner, has teamed up with AT&T; because of its worries about service reliability.
