AT&T Goes Local
Shares of Teleport Communications Group (Nasdaq:TCGI - news) plunged $3 3/8 to $54
3/8 after the Wall Street Journal reported that AT&T (NYSE:T - news) was considering a
"take-under" that would value the shares at $56 a pop. Shares of Teleport's pending partner
ACC Corp. (Nasdaq:ACCC - news) slipped $3 to $49 1/2 in sympathy with the fall in
Teleport stock, as ACC is being purchased for a fixed amount of Teleport stock. Investors
should not feel too bad for Teleport shareholders, as you pretty much had to buy stock in the
local phone service provider based on the AT&T takeover speculation in early December to
get in at higher prices.
The deal would finally end speculation about when AT&T will enter the local phone market for
the first time since the break-up of Ma Bell in 1984. Investors have been speculating for
months that AT&T was interested in buying Teleport, the first and largest competitive local
exchange carrier (CLEC) in the U.S., but then again, investors have been speculating that
AT&T was going to buy something since the close of 1996. Although much anticipated,
long-distance companies have had difficulty penetrating the Baby Bells' monopolies on local
phone service. AT&T's reluctance has probably been a combination of management turmoil
and a desire to find a partner that matches the company's nascent business strategy. This
delay, however, has not stifled shareholder enthusiasm about AT&T, whose stock has risen
substantially over the past year as investors have anticipated the potential benefits of the
1996 Telecommunications Act. Under the guidance of Chairman C. Michael Armstrong,
investors believe that AT&T will shed nearly a decade of underperformance and become a
lean, mean, telecom machine.
In Teleport, AT&T would acquire a company that provides local phone service to businesses
in 66 metropolitan markets -- including 29 of the top 30 regions. With only $850 to $900
million in anticipated revenues this year pending the completion of the ACC Corp. acquisition,
the deal puts Teleport at approximately 14.4 times historical sales, including ACC Corp.
revenues but not counting a number of small acquisitions the firm has completed over the past
few months. This is a pretty steep price tag, but given that AT&T could push cheap, local
phone service to businesses bundled with its panoply of other offerings, it is not an entirely
outrageous price. As Teleport currently does not generate cash, AT&T is really buying the
company for its equipment and current customers as a way to get into the local phone market
quickly. The deal is also contingent on the approval of a few very large Teleport shareholders,
including 28.5% owner Tele-Communications Inc. (Nasdaq:TCOMA - news) , 22.4% owner
Cox Communications (NYSE:COX - news) , and 14.7% owner Comcast Corp.
(Nasdaq:CMSCA) .
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