Under the terms of the agreement, AT&T will combine its consumer long distance, wireless, and Internet services with TCI's cable, telecommunications, and high-speed Internet business to create a new subsidiary called AT&T Consumer Services. The companies said they do not expect "significant downsizing" to result from the deal.
AT&T Consumer Services intends to "significantly accelerate" its cable infrastructure to provide digital phone and data services, as well as digital video services, to consumers by the end of 1999, the companies said. They expect the deal to close during the first half of next year.
"Today we are beginning to answer a big part of
AT&T chairman Michael Armstrong, left, and TCI chairman John Malone announce the $48 billion deal in New York. AP
In a conference call this morning, Armstrong said the two companies worked late into the night to work out all the details of the pact. TCI chief executive John Malone noted that the definitive agreement was put together in eight days.
"This merger is a tremendous growth opportunity for TCI's shareowners and employees," Malone said. "As TCI continues the large-scale deployment of advanced digital set-top devices, AT&T's extraordinary brand and resources are ideal complements to TCI's broadband cable distribution and operations."
Many analysts praised the deal, although it came at a premium. "It's a knock-out punch by AT&T, because MCI and Sprint haven't articulated a clear strategy for the consumer market," said Abhi Chaki, an analyst with Jupiter Communications. "TCI is getting the AT&T brand, and money to upgrade its networks."
Added Boyd Peterson, an analyst with the Yankee Group, an industry consulting firm: "Given the circumstances, it's as good a deal as AT&T can get." AT&T might have been better off merging with a Baby Bell such as SBC Communications to enter the local phone market, he added, but such a deal likely would have run into steep regulatory opposition.
Now, AT&T will be pitted against SBC in large local markets, such as San Francisco and perhaps Chicago. SBC has expanded its reach through acquisitions of its own. But while AT&T is adding cable TV to its lineup, SBC has cut back on any digital TV offerings.
The deal's hefty $48 billion price tag includes $32 billion in stock and $16 billion in assumed debt. The deal calls for AT&T to issue 0.7757 shares of common stock for each share of TCI Group Series A stock and 0.8533 shares of AT&T for each share of TCI Group Series B stock.
The newly merged company will trade as a "letter" or "tracking" stock on the New York Stock Exchange and have a "significant public ownership," the companies said. AT&T also will issue separate tracking stock to holders of Liberty Media, TCI's programming arm.
AT&T president John Zeglis will become chief executive of AT&T Consumer Services, and TCI president Leo Hindery will be the new unit's president and chief operating officer. Malone will step down as TCI's CEO, but will become a member of AT&T's board.
AT&T Consumer Services could generate 1999 revenue of about $33 billion and earnings of about $7 billion to $7.5 billion, according to estimates by AT&T and TCI. The companies said they expect the merger to produce higher revenue and lower costs, producing "synergies" of about $2 billion per year starting three years after the deal closes.
The deal is likely to draw close scrutiny from antitrust regulators. It would combine the nation's largest telephone carrier with the nation's second-largest cable television operator behind Time Warner.
The merger would provide AT&T with a "one-stop shop" to provide telephone, cable TV, and Internet access. The concept was supposed to be a byproduct of telecommunication deregulation two years ago, but has yet to materialize. Both telcos and cable TV providers have been distracted with competition in their own backyards, as well as with continued regulatory obstacles to entering new markets.
TCI has some 13 million customers nationwide, including markets such as Chicago, Denver, Dallas, Portland, Pittsburgh, Pennsylvania; San Francisco, Salt Lake City, Seattle, and St. Louis. Most important, TCI will give AT&T what is known as the "last mile" of connectivity, providing local phone service, not just cable TV, to consumers.
In addition, TCI has voting control of @Home, which provides high-speed Net access through cable systems. Its subscribers total more than 100,000--a relatively small number, considering the potential market--but @Home, through its partnerships with other cable providers, provides distribution to almost 50 percent of all homes passed by cable in North America. It also is one of the hotter Internet stocks, surging more than 30 percent in today's trading alone, rising 11.9375 to close at a new high of 51.1875. AT&T previously has discussed a possible alliance with @Home.
Today's deal marks the first big merger between a telco and a cable TV company since deregulation--a bold move. But under CEO Armstrong, who succeeded Robert Allen last fall, AT&T has tried to revitalize itself. Two big holes in its strategy: providing local phone service and expanding its Internet business beyond its dial-up service, dubbed WorldNet.
By contrast, AT&T competitors MCI and WorldCom have moved quickly to provide the full array of telecommunications and data services. The two are proposing to merge.
"We're confident that under AT&T's ownership, TCI's cable infrastructure will be opened up so we and others can purchase broadband connectivity wholesale and make it available to our online customers," Steve Case, chairman and CEO of America Online, said in a statement. "We look forward to entering into a broadband reseller agreement with AT&T once the merger with TCI is complete, and we look forward to entering similar agreements with other cable companies as they too embrace a truly 'open cable' approach."
After a long hibernation, AT&T's stock has been on the rise: It closed yesterday at 65.375, up 2.3125.
TCI recently has rebounded under chief executive Malone and newly installed president Hindery. It has cut costs, concentrated its operations in select markets, and even taken strides to marry new television and Internet programming with its extensive distribution network.
TCI's once-laggard stock price closed yesterday at 38.6875, up 3 points, close to a 52-week high. The stock has traded as low as 14.125 and as high as 39.375 in the past 52 weeks.
Despite the gains, many analysts still considered TCI a buyout candidate. They pointed to TCI's giant cable system, coupled with the "urge to merge" among cable companies, telcos, and media companies under deregulation.
This is not the first time that TCI has teamed up with a telco. In 1983, TCI agreed to be acquired by Bell Atlantic for $16.7 billion, but the deal later unraveled because of philosophical differences.
Under Malone, TCI has helped reshape the cable industry. The company's own roots date back to the 1950s, when founder Bob Magness, an Oklahoma cottonseed salesman, launched the business to bring decent television reception to the rural Midwest.
Malone's deal-making, as well as his penchant to drive a hard bargain, have become legendary in the industry. He also has been dubbed "Darth Vader" by some politicians for his cold attitude toward regulation.
As part of the TCI buyout announcement, AT&T also said its second-quarter earnings would exceed analyst estimates of 80 cents to 82 cents per share by 8 cents to 10 cents, "due to earlier and better-than-expected benefits from its ongoing cost-reduction efforts."
As a result of the pending merger, AT&T said it anticipates 1998 earnings of $3.35 to $3.45 per share.