<A> WinStar, AT&T, Teleport -2: WinStar Should Report Strong 4Q
<A> Buying Teleport Seen As Smart But Pricey Move For AT&T
By Shawn Young
NEW YORK (Dow Jones)--Word that AT&T Corp. (T) is preparing to buy Teleport Communications Group Inc. (TCGI) for $10 billion to $11 billion was heralded Thursday by investors who have been waiting for the nation's largest long-distance carrier to make a decisive move into the local phone market.
The two companies have been in merger talks for some time, according to sources familiar with the situation. The Wall Street Journal reported Thursday that a deal could be announced before the week is over.
A merger between AT&T, based in New York, and Teleport, the country's largest independent local phone carrier, would be pricey but worth it for AT&T, which has been slow to move toward offering a comprehensive range of local, long-distance and Internet services, analysts said.
"AT&T had a major hole in its strategy and it could be filled here," said Eric Strumingher, analyst at PaineWebber Inc.
"Is it a smart move for AT&T? Yes," Strumingher said. "Is it nonetheless a shocking valuation? Absolutely."
Teleport, which caters to large businesses, is expected to report 1997 revenue of about $500 million. At about $56 a share, or $10 billion to $11 billion, AT&T would be paying about 20 times Teleport's revenue.
"That's a huge multiple for a company that's not making any money," said Strumingher. Analysts expect the company, which is making big investments in its network, to report a loss in 1997 of $1.23 a share.
Teleport reported a pro forma loss of $126.6 million, or 86 cents a share, on revenue of $238.4 million in 1996.
AT&T earned $5.9 billion, or $3.66 a share, on revenue of $52.2 billion in 1996.
What makes the deal wise, Strumingher said, are Teleport's strategic assets.
The company's networks reach about 60 markets, including the large urban centers where AT&T's most lucrative business customers are concentrated.
"I think the price could be easily justified," said one source who asked not to be named.
A deal with Teleport could save AT&T a fortune because the long-distance carrier won't have to pay local Bell companies for access to their networks. Therefore, the partnership could quickly add to AT&T's bottom line, the source said.
Perhaps more importantly, a deal would mark a strategic awakening for AT&T under its new chairman and chief executive, C. Michael Armstrong, observers said.
In a sinking overall market, AT&T's NYSE-listed shares gained 1, or 1.7%, to 61. Volume was 2.9 million. Average daily volume is 5.4 million.
Teleport shares sank 3 3/8, or 5.8%, to 54 3/8 on Nasdaq volume of 2.6 million. Average daily volume is 1.4 million.
Citing company policy, an AT&T spokeswoman refused to comment on speculation about a merger. Teleport officials did not immediately return calls seeking comment.
WinStar also adopted a "poison pill" shareholder rights plan in July, which analysts said then was designed to deter coercive takeover tactics. Under the plan, which is triggered if any party acquires a 10% stake in the company, one preferred stock right is issued as a dividend for each common share held as of July 14, 1997.
Rouhana said in a December interview that he considered WinStar's licenses "a national treasure" to be developed carefully.
An AT&T-Teleport deal may also bear negative implications for WinStar, because of Teleport's BizTel unit, said analyst May, of Pacific Growth Equities.
While the reported deal is "overall positive" for WinStar, he said, "it does also mean that AT&T's buying a 38 Ghz license-holder that is a competitor to WinStar, and I think that's a minor negative in this that the market is not really focusing on."
But because AT&T could pay as much as $11 billion for Teleport, a company with a projected 1997 revenue of about $500 million, WinStar could reap a windfall if the nation's largest long-distance carrier shows a similar interest, May said.
Several sources familiar with WinStar expect the company to preannounce some positive fourth-quarter results. Ken Hoexter, an analyst with Goldman Sachs & Co. agreed, but said he believes WinStar's losses in Ebitda, or earnings before interest, taxes, depreciation and amortization, will also be stronger than expected. Many market-watchers use the Ebitda numbers to gauge the success of the competitive phone-service companies, many of which still operate at a loss.
Hoexter attributed the Ebitda losses to the company's recent good fortunes. "Because of the success they're having, they're going to roll out very quickly and get ahead of the competition," he said.
In the recent past, WinStar purchased the assets of Midcom Communications Inc. (MCCIQ) for $92 million. Analyst Reagan of Legg Mason said WinStar provides wireless service in 10 major markets, and is scheduled to be in 20 by year's end.
Hoexter said he expected WinStar's Ebitda losses to "bottom out" in the fourth quarter, and improve subsequently.
-Brian Steinberg; 201-938-5218;
brian.steinberg@cor.dowjones.com
"Dow Jones News Service"
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