AT&T's bold move to buy TCI faces multiple hurdles
- 24 June, 1998 22:00
AT&T will get much-needed access to local consumer telecommunications markets once its bold move to acquire US cable television provider Tele-Communications (TCI) is complete, but the task of integrating the infrastructure, services, and corporate cultures of the two companies is enormous.
The value of the all-stock deal is about $US48.3 billion, according to C. Michael Armstrong, chairman and chief executive officer (CEO) of AT&T, in conference calls with press and analysts. About $31.8 billion of that is for the core TCI cable company, another $11 billion will pay for TCI debt, and another $5.5 billion will go to buy back some AT&T stock and @Home Network, a TCI affiliate, he said.
But the total value of the new grouping also includes another $20 billion, for Liberty Media Group, TCI's programming arm, which will remain an affiliated "tracking stock" company, but is not directly involved in the equity offering for TCI, Armstrong said.
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.
When the merger is complete, AT&T Consumer Services' cable systems will service 33 million homes. 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 move will see AT&T muscle into consumer markets for local telecommunications, high-speed Internet access and entertainment, allowing the company to catch up to the double digit growth that the most aggressive telecom companies are enjoying, Armstrong said.
"This represents that AT&T is going on the offence," he said in the conference call.
One of AT&T's main aims in acquiring TCI is to begin offering cable-based telephony and high-speed Internet access services, officials said on the conference call.
Following the completion of the merger, AT&T plans to accelerate the upgrade of TCI's cable infrastructure already going on, so that it can carry digital voice, video and data services to consumers by the end of 1999, TCI and AT&T officials said. The idea will be to offer integrated packages of services, such as cable television, local and long distance telephony and Internet access.
Many telecom companies have been tapping into new demand for value-added telecom services such as data communications, and extra lines going into homes for Internet access, and have been generating double digit growth. "The only problem is that AT&T wasn't participating in that," Armstrong said.
The big problem has been that AT&T has not had access into the so-called "last mile" to consumer homes to supply local and value-added telecom services, AT&T officials acknowledged today.
"We've got to have a facilities based strategy," so AT&T owns its own infrastructure to get into consumer homes, Armstrong said.
The TCI acquisition jump-starts the AT&T effort to have its own infrastructure into the home, avoiding the long, expensive process of building its own from scratch, and avoiding having to connect to the local Bell companies, analysts agreed.
"AT&T has been criticised for not having access strategy," said Liza Henderson, director of TeleChoice Inc., a telecom consultancy based in Boston.
"With this acquisition, they're getting what they really need -- access to the home," she said. AT&T acquisition of Teleport Communications Group (TCG) Inc., announced in January, gave them local access, but it was limited to business and corporate markets, she noted.
AT&T's options for building up its local access strategy were limited, and the TCI acquisition was one of the few moves that really made sense, said analysts.
"The acquisition of TCI is much more likely to pass regulatory scrutiny than an acquisition of, for example, a Bell (company)," said Robert Rosenberg, president of Insight Research, a telecom consultancy in Parsippany, New Jersey. "This is not a case of the Bell system trying to put itself back together."
But the acquisition faces enormous hurdles as the two companies try to mesh fiber and coaxial infrastructure and corporate cultures, analysts said.
"When you get the culture of an @Home, where people are coming from university and a range of backgrounds, which is more free wheeling than the established telephone company background, the old line demeanor will have to change," said Joel Maloff, principal of networking and telecom consultancy The Maloff Group International Inc., in Dexter, Michigan.
Combining services and infrastructure will also pose hurdles, analysts said.
"They will have fiber in the (cable) head ends and large (telecom network) rings, but when you get down to trunking and access you have a lot of coaxial," Insight's Rosenberg. The task of integrating the local access to the back end network will be huge, he noted.
Services and sales arms of the two companies will have to be merged, which is as big a task as the technology integration, said TeleChoice's Henderson.
"You have to educate the sales and marketing teams, and also create billing systems that can support the combined services," Henderson said.
Investors reacted to the announcement by knocking down AT&T shares by 5-3/16 during late morning trading, to 60-3/16.
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.
Meanwhile, parent company AT&T Corp. 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.
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.
John Malone, TCI's chairman and CEO, will serve as chairman of Liberty Media Group, which upon close of the AT&T acquisition of TCI will combine Liberty's current programming services with what is now TCI Venture Group, TCI's technology investment unit.
Separately, AT&T has predicted that 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, it 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 (TCG) 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.
(Additional reporting by Nancy Weil in Boston.)