[chat - WSJ: AT&T Appears Close to a Deal To Acquire TCI for $30 Billion]
Merger Would Provide Long-Distance Giant With an Easy Route Around the Baby Bells
NEW YORK -- AT&T Corp., the nation's largest telecommunications company, is in intensive negotiations to acquire the nation's largest cable-TV operator, Tele-Communications Inc., for more than $30 billion, mostly in stock.
The audacious move, which could be announced as early as Wednesday morning, could give AT&T instant access to TCI's 22 million cable-ready homes in dozens of states, offering AT&T a digital platform for selling long-distance and local phone service, along with cable and Internet services.
The two sides were close to a final accord Tuesday night. The talks could still fall through, and regulatory hurdles -- particularly in today's antitrust climate -- might complicate any deal. But people familiar with the negotiations said AT&T would pay the equivalent of about $50 a share, most of it in the form of AT&T stock, to acquire all of TCI's 622 million shares. That would mark a premium of about 39% over TCI's recent trading price of $36.
In trading on the New York Stock Exchange Tuesday, AT&T closed at $65.375, up $2.3125 a share. TCI closed at $38.6875, up $3 a share, on heavy volume on the Nasdaq Stock Market.
Most important for AT&T, buying TCI, which also owns stakes in a coveted portfolio of popular cable channels, might enable AT&T to crack open the $100 billion-a-year local-phone monopoly. TCI would offer AT&T a nifty detour around "the last mile" -- the phone wiring into millions of homes and businesses that remains in the absolute control of the Baby Bells, GTE Corp. and other local phone companies. AT&T hasn't owned local phone lines in more than a decade, since the government broke up the Ma Bell monopoly and created seven Baby Bells.
Trying to duplicate that enviable infrastructure would be fantastically expensive and take more than a decade, even for a behemoth like AT&T, with more than $51.3 billion in 1997 revenue. Until now, AT&T and other would-be challengers have had to rent the lines from the local-phone incumbents and resell service at a meager markup, but the Bells have been especially balky negotiators. AT&T has spent upward of $4 billion in the past two years trying to invade the local market -- and has reaped just $65 million in revenue to show for it. AT&T Chairman C. Michael Armstrong shelved that effort shortly after taking over the top job late last year.
TCI's wires would give AT&T a potentially potent alternative. But the biggest question may be whether Ma Bell can get this deal done. We have, after all, heard this before: In the fall of 1993, another telecom titan, Bell Atlantic Corp., struck a deal to acquire TCI for $16.7 billion, hoping to use TCI as a conduit for invading local markets outside Bell Atlantic's own territory. That deal quickly cratered for reasons that now seem short-sighted: new federal rules capped cable prices (and were later abandoned); Bell Atlantic balked at the idea of slashing its dividend to spend the savings on new networks; and TCI executives grew frustrated with Bell Atlantic's conservative ways.
Another wild card in that deal -- and this one: TCI Chairman John Malone. Mr. Malone controls TCI absolutely, and he is legendary in the cable business as a shrewd deal-maker who isn't above shaking hands and then walking away. In the accord now under negotiation with AT&T, Mr. Malone would take a backseat role, staying around to run TCI's programming arm, Liberty Media, which would continue to have its own "tracking stock," which is a stock that follows the performance of a particular division or asset of a larger company. Mr. Malone would maintain complete independence at Liberty. But then, Mr. Malone made similar noises about stepping back when he had agreed to the merger with Bell Atlantic.
This time around, however, there may be reason to believe that Mr. Malone wants to play ball. He had to come out of semiretirement last year to steer his drifting company back on track, and now he has done so. AT&T, whose annual revenue is more than six times TCI's 1997 revenue of $7.6 billion a year, would provide the cable operator with especially deep pockets and a nationwide network. That might enable Mr. Malone one day to deliver on his oft-repeated promise to deliver "500 channels" of all kinds of digital fare to cable homes across the nation.
And Mr. Malone's personal chemistry with AT&T's new chief, Mr. Armstrong, seems especially good. After meeting with the newcomer at AT&T a few months ago, Mr. Malone told an aide: "I've met every AT&T chairman since 1964, and this is the first one that gets it."
TCI, in fact, is a major owner with two other cable operators of Teleport Communications Group Inc., the local-business phone rival that AT&T announced in January that it had agreed to acquire for $11.3 billion. That deal gave AT&T a fast leg up in trying to bypass the Bells to offer service directly to business customers; now a move to buy Teleport co-owner Tele-Communications would do much the same in the consumer market.
Under terms of the deal being discussed, AT&T would grab hold of cable assets that include wholly owned systems reaching 10 million homes, plus stakes in systems reaching 11 million more. It also would maintain an alliance with TCI's programming arm, Liberty Media Group. Its rich stable of programming assets includes stakes in some of America's most popular cable networks -- Discovery, Black Entertainment Television and Fox/Liberty Networks, which operates 21 regional sports networks, among other assets. Liberty also has stakes in Time Warner Inc., the entertainment conglomerate, and QVC and USA Networks, overseen by industry honcho Barry Diller.
AT&T also would acquire outright some key assets of TCI Ventures, which oversees TCI's digital businesses, including its stake in AtHome Corp., the highflying Internet service whose investors also include Cox Communications Inc. and Comcast Corp. Remaining TCI Ventures assets would be folded into Liberty, people familiar with the matter said. TCI Ventures, created in 1997, is already a separate, publicly traded company.
People familiar with the talks said the transaction could ultimately result in AT&T having three tracking stocks. One would cover its newly acquired cable-TV business unit and its consumer phone businesses. A second would cover its business customers. The last would be Liberty, which would remain operationally independent.
But the local business appears to be one of the most attractive angles for AT&T. Its long-distance franchise, in which AT&T currently holds roughly a 60% share of the $80 billion-a-year market, is bound to come under attack from well-funded and well-positioned Bells within a year or two, once those local monopolies are allowed to enter that business. AT&T needs a local play to offset inevitable losses of sales in its core business -- but it has largely failed in two years of efforts to muscle its way into the local phone business.
The nation's No. 1 long-distance company has trotted out a succession of local-phone strategies, abandoning them in rapid succession. Early on, AT&T had intimated that it might build its own local phone networks, but backed off when it became apparent that this approach would be far too costly. Then it floated the idea of using wireless devices to sidestep the Bells' networks altogether, but didn't have a concrete business plan -- or even a suitable wireless device -- to pull it off. Work on that angle continues, but nothing is imminent.
Frustrated with the Bells' resistance, AT&T also filed dozens of lawsuits against the regional phone companies to get them to open up their networks faster. It also challenged the Bells' prices for network components, which are modestly discounted for would-be rivals such as AT&T, in all 50 states. Neither approach yielded much.
The hurdle for AT&T, all along, has been that last mile -- how to gain direct access to customers' homes and businesses. As a long-distance provider, AT&T has no such link, relying on the Bells to carry calls over the last mile or so as they travel to and from their final destinations-and paying them "access fees" that amount to about 40 cents of each dollar that AT&T collects for a long-distance call.
Cable companies, of course, don't have that problem. Besides the Bells, cable companies have the only other direct links into homes and businesses.
That isn't to say that an AT&T-TCI deal would create a run on cable stocks. This combination would marry a long-distance company with a "local-wires" company -- that is, TCI, but the other players big enough to contemplate multibillion-dollar deals, such as the Bells, already have plenty of wires themselves. A cable deal might not offer much upside for them.
In addition, most major cable companies already have alliances that could thwart a takeover frenzy. Time Warner, the No. 2 cable operator, is in partnerships with U S West Inc., the Denver-based Bell; Comcast is partly owned by Microsoft Corp. And cable stocks are pretty pricey these days, having enjoyed a strong run in the past year as they have come to be viewed as the best pathway into the home for digital services.
Cable stocks jumped anyway Tuesday on rumors that a big cable deal might occur. Cablevision Systems Corp. rose $7.25 to $62 a share on the American Stock Exchange. Comcast shares rose $2.78 to $41.69 on the Nasdaq. Shares of Time Warner rose $3.125 to $83.25 in composite trading on the New York Stock Exchange.
AT&T and TCI first got to know one another last year when they negotiated the Teleport deal. After that, the two companies continued to look for ways to work together. In rapid succession, they explored the possibility of AT&T's buying into AtHome, the Internet service, but were unable to strike a deal. Then they looked at the possibility of setting up an Internet phone service company, a la At Home, but again couldn't agree on a final plan.
The two finally hit on the idea of just having AT&T buy TCI outright. With the Bells buying up each other-witness Ameritech Corp.'s May agreement to acquire SBC Communications Inc. for $56.6 billion -- and the general merger mania sweeping the telecom industry, executives reasoned that an AT&T-TCI merger would pass regulatory muster quickly. That's because it involved companies from two different industries.
For Mr. Malone, selling TCI would mark the end of an era. He was one of the first to sketch out the possibilities of cable, envisioning a world of two-way wires capable of carrying phone services, interactive video and, ultimately, a plethora of viewing choices. Mr. Malone, an engineer by training, set off the "interactive television" craze in the early 1990s by declaring the possibility of a 500-channel world. Though it hasn't happened yet, the challenge helped galvanize the industry.
The overture from AT&T comes at a time when TCI has bounced back from hard times. The company's stock price has more than doubled in the past 52 weeks, and relations with regulators and customers are solid. Much of TCI's progress can be attributed to Mr. Malone's No. 2, Leo Hindery Jr., whom Mr. Malone singled out in his annual message for his "deep gratitude" for helping to get TCI back on track.
Under the terms being discussed, Mr. Hindery would hold a powerful role in the combined consumer-services company that AT&T would set up if the deal with TCI goes through. He would serve as president of that unit. That would give him oversight of cable and the long-distance business, according to some people familiar with the plans. AT&T's No. 2 executive, president John Zeglis, would become chairman of the consumer-services unit, overseeing Mr. Hindery.
Under the new management structure, Mr. Malone would become chairman of AT&T's newly acquired Liberty programming arm, leaving Robert Bennett, Liberty's current president, to continue in that role. Mr. Armstrong would reign over the whole shebang as chairman of AT&T.
Mr. Hindery joined TCI a little more than a year ago. In short order, he fired most of TCI's top management team, beefed up capital spending-and hit the road to mend years of broken fences with regulators and consumers. He also set about to whittle down TCI's far-flung cable empire, a move aimed at getting better cable "clusters" that could be more efficiently managed.
By the end of 1997, under Mr. Hindery, TCI had struck 12 new partnerships and 10 system swaps with other cable companies.
It is expected that Denver will continue to be the headquarters of TCI's cable operations. But if this deal goes through, it is also expected that TCI's brass will be spending a lot of time in Basking Ridge, N.J.-the base of their new bosses at AT&T headquarters. |
