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AT&T leads $1.4 billion stake in Net2Phone

A group of companies led by the long-distance telephone giant says it will make a $1.4 billion cash investment in the Internet telephone services provider.

Throwing weight behind the emerging Internet telephone market, a group of companies led by AT&T today said they have agreed to make a $1.4 billion cash investment in Net2Phone.

The news sent shares soaring for Net2Phone, which creates software and networks that allow people to make cheap long-distance calls over the Net, and IDT, the company's controlling shareholder. In early trading, Net2Phone advanced $5.56, or 10 percent, to $60.94. IDT rose $3.95, more than 10 percent, to $41.20. Meanwhile, AT&T dipped 31 cents to $57.50, and Yahoo fell $2.63 to $166.88.

Under terms of the agreement, the group said it will purchase 4 million newly issued shares from Net2Phone at $75 per share. In addition, the consortium will buy 14.9 million Net2Phone shares from IDT for $75 per share. Following these transactions, the consortium will have a 39 percent voting stake and a 32 percent equity stake in Net2Phone, a cash investment of approximately $1.4 billion.

Thomas Morabito, a financial analyst at BB&T Capital Markets, said the move validates the rapidly emerging market Net2Phone plays in.

"Investments (from big name companies) just firmly positions Net2Phone and IDT in the leading role in what has been a very hot sector in the telecom market," said Morabito. "Net2Phone without question is the leader in the Internet telephone space. Having someone like AT&T put in this kind of investment is a huge win for both companies."

Morabito added, "AT&T saw the value there. They have to get more aggressive about cutting-edge technology."

The move comes at a time when consumers and businesses have been warming to online phone services. Calls routed over the Internet jumped from 200 million minutes in 1998 to 2.5 billion minutes by 1999's year-end. Although that number is small compared with the 7 trillion minutes people spent on traditional phone networks last year, it's a sign that Web-based calls have gained popularity.

Traditional communications firms and telephone services have been eyeing the nascent market. Earlier this week, AT&T's Liberty Media Group agreed to buy 9.9 percent of IDT for $130 million in cash to expand its position in the telephone and Internet markets.

Cisco Systems also recently said it is adding new technology to Avvid, an Internet-based voice networking strategy unveiled last fall. Among several benefits, Cisco said the technology will enable businesses to use the same network wiring to communicate between PCs and phones.

Net2Phone also nabbed a 5 percent minority stake from Yahoo today. It issued and sold Yahoo 2.8 million shares in exchange for 806,000 shares in the online giant, a deal valued at $150 million.

AT&T plans to invest $725 million for a 51 percent interest in the consortium's stake in Net2Phone. It said other partners, including Liberty Media and British Telecommunications, are expected to purchase the remaining interest.

AT&T said it plans to jointly develop new Internet voice applications for cable telephony and the business communications market. AT&T and IDT will each get a license to sell Net2Phone's services at the lowest cost.

Additionally, AT&T and IDT have agreed to enter a commercial pact to become each other's preferred supplier for a three-year period. AT&T will supply two-thirds of IDT's domestic voice and data communications services, and the companies will house equipment at each other's data centers. IDT said it has reached similar agreements for international services with Concert, the global joint venture of AT&T and BT. It said it expects to increase revenue and lower costs through these arrangements.

The consortium, which will have the right to nominate three members to the Net2Phone's board of directors, said the deal already has been approved by the boards of AT&T, IDT and Net2Phone. The companies said the deal, which is subject to closing conditions and regulatory approval, is expected to close by the third quarter.