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Technology Stocks : AT&T -- Ignore unavailable to you. Want to Upgrade?

To: Mark Palmberg who wrote (1602)	7/30/1998 10:04:00 AM
From: EPS	Read Replies (2) \| Respond to of 4298

Billions of reasons for AT&T-TCI deal Savings from access fees may lead to a happy marriage By Lewis Perdue, CBS MarketWatch Last Update: 9:43 AM ET Jul 30, 1998 Also see Tech Report SAN FRANCISCO (CBS.MW) -- Bears who growled at AT&T's plan to acquire Tele-Communications Inc. may have missed something: owning a cable into U.S. homes and offices will help reduce the $12 billion AT&T pays each year to the Baby Bells in local access charges. That's no small matter as AT&T jumps into the $100 billion local phone market, but it was largely glossed over as investors drove down AT&T shares after the merger was announced. AT&T's market cap fell by about $14 billion in just three days starting June 24. Shareholders were leery of TCI's $16 billion in debt and concerned about capital expenditures required to upgrade a cable system to handle phone service. The stock (T) skidded to 56 3/4 from 65 3/8. It's now about 59. According to AT&T spokesman Oriano Pagnucci, local telephone companies that were once part of the Bell System receive about $25 billion per year for connecting local customers to their long distance carriers. With 55 percent of the long distance market, AT&T's share would be just over $12 billion -- nearly a quarter of the company's 1997 revenue of $51.3 billion. AT&T said it will need to spend about $5 billion over the next four years and that TCI telephony won't be available until 2001. But this is balanced against the company's current $12 billion annual local access bill and the now-real prospect of competing for more local business. 'Freaked out' investors Shareholders who rushed to dump their AT&T stock may have been spooked for all the wrong reasons, according to Salomon Smith Barney analyst Stevyn E. Schutzman. "Everybody's freaked out, but the fact is that AT&T's done a deal like this before," said Schutzman. "They bought McCaw cellular for $14.5 billion and poured a boatload of CapEx (capital expenditures) into it. And it wasn't a matter of profitability in those days, it was a matter of market share. And look where it got them. Today, they're the market leader." Indeed, shareholders shouldn't have been surprised by AT&T's aggressiveness in snapping up TCI as a solution to bypassing local exchange carriers -- LECs. In speech after speech, AT&T President John D. Zeglis has continually slammed LECs for their unwillingness to cooperate in offering competitive local service, and he reiterated his company's intense desire to find ways around the intransigence. In a presentation to the American Enterprise Institute on Dec. 18, Zeglis said that local service was "a $100 billion market virtually untouched by serious competition. Strategically, it's a crucial part of the integrated service packages we're counting on to create customer value in the future. We want to be the industry leader in providing service over any distance, in any form. Local service is absolutely critical to delivering on that strategy." "We want into that $100 billion a year market badly," he said. "In bottom line terms, local service is a strategic and economic imperative for AT&T." Teleport deal AT&T's $11 billion purchase of Teleport Communications Group (TCG) helps it helps it bypass the LECs for business customers. It sees the cable-TV connection as entree into American homes as well. "If AT&T did not do this, they were going to be dead," says Schutzman who attributed shareholder skittishness to AT&T's inability properly to explain the meaning of the TCI deal. "This [the TCI acquisition] is a great transaction," Schutzman said. "The shareholders are flipping out because they don't see what it all means. AT&T hasn't found the ideal way of explaining it to shareholders yet." For their part, LECs are sweating the potential drop in local access fees. SBC Corp. (SBC), for example, raked in $5.8 billion in local access fees in 1997 representing 23 percent of the company's revenue. "It's a gold mine and they know it," said Mike Harris, President of Kinetic Strategies, Inc., a Phoenix-based telecommunications research firm. Another telecom analyst, Frank Dzubeck, President of Communications Network Architects in Washington, D.C., said, "Over time I see local-access charges going to zero." And where do LECs see the income to replace this? "We're going to make it up in long distance," said SBC spokesman John Britton. So far, state regulatory bodies have refused to allow SBC into the long distance market because, they say, the local markets have not yet been opened up to competition. All of which is just the point AT&T has tried to make with its TCI and TCG acquisitions: if the LECs won't open up their own infrastructure for local competition, the long distance giant is determined to find its own path along that last mile to phone customers. Lewis Perdue writes for CBS MarketWatch. The author of 15 books, Purdue has extensive experience writing about telecommunications, science, technology, general business, politics, travel and wine.