AT&T to buy cable operator TCI

By Kristi Essick
IDG News Service, 6/24/98

In a move that will see the U.S. telephone giant AT&T muscling into consumer markets for local telecommunications, high-speed Internet access and entertainment, the company announced today that it has reached a definitive agreement to acquire U.S. cable television provider Tele-Communications, Inc. (TCI) in an all-stock deal valued at $48 billion.

Under the terms of the agreement, AT&T will issue 0.7757 shares of AT&T 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. At today's prices, this equates to about $48 billion, AT&T said in a statement. AT&T is predicting the merged company could have revenues of $33 billion in 1999.

Should the merger receive the appropriate regulatory and shareholder approval, AT&T will combine its current consumer long-distance, wireless and Internet services units with TCI's cable, telecommunications and high-speed Internet businesses to create a new subsidiary called AT&T Consumer Services, the company said. The new subsidiary will provide a wide-range of consumer communications services, including local and long-distance phone services, wireless communications, cable television, as well as dial-up and high-speed Internet access - all under the AT&T name.

Meanwhile, parent company AT&T will focus its energies solely on the business communications market and wholesale networking services, the company said. AT&T will provide global communications, data networking and wireless services to businesses, leaving the new AT&T Consumer Services venture to focus on the consumer market.

One of AT&T's main aims in acquiring TCI is to begin offering cable-based telephony and high-speed Internet access services. Following the completion of the merger, AT&T plans to upgrade TCI's cable infrastructure so that it can carry digital voice, video and data services to consumers by the end of 1999, AT&T said. The idea will be to offer integrated packages of services, such as cable television, local and long-distance telephony and Internet access.

The other huge gain to AT&T is the ability to offer local telephone service to consumer customers via cable, the company said. The deal will allow AT&T to circumvent regional telecom operators completely by offering local phone services via cable, instead of having to sign deals with the local providers, AT&T executives said. Denver-based TCI is the second-largest cable company in the U.S. behind Time Warner, Inc. and has already achieved a measure of success in offering phone service over its cable networks in some markets.

"Today we are beginning to answer a big part of the question about how we will provide local service to U.S. consumers," said C. Michael Armstrong, chairman and CEO of AT&T, in the statement.

When the merger is complete, AT&T Consumer Services' cable systems will pass 33 million homes, AT&T said. In addition, AT&T Consumer Services will hold a controlling interest in the @Home Network through its acquisition of TCI. @Home currently has affiliate agreements with TCI and other cable companies that collectively pass more than 50 million homes, AT&T said.

The companies expect the merger to be complete in the first half of 1999, should it clear regulatory and shareholder approval. Both AT&T and TCI said they do not expect many layoffs as a result of the merger. John Zeglis, currently president of AT&T, will become chairman and CEO of AT&T Consumer Services, while TCI's president Leo Hindery will be the new unit's president and chief operating officer.

Separately, AT&T has predicted its second-quarter earnings will exceed analyst estimates of around 80 cents per share by 8 cents to 10 cents, the company said. The better-than-expected results are due to earlier and better benefits from its ongoing cost reduction efforts, AT&T said. AT&T now anticipates that its 1998 earnings will be $3.35 to $3.45 per share, which reflects the company's pending merger with Teleport Communications Group, Inc.

In this era of mega-merger mania, AT&T may not be content with only acquiring one of the U.S.'s largest cable operators. Today's news follows hard on the heels of rumors circulating this week that AT&T is negotiating an alliance with British Telecommunications plc.