AT & T On the Clock as Merger Closes

6/18/2000 8:00 PM Eastern

The clock is ticking for AT & T Corp. to make a decision to divest its stake in either Liberty Media Group or Time Warner Entertainment.

With the closing of its $44 billion purchase of MediaOne Group Inc. last week, AT & T set the wheels in motion for a divestiture of either of the two companies in order to come into compliance with Federal Communications Commission rules.

AT & T has until May 19, 2001, to come into compliance, although it must notify the FCC of its decision within six months of the closing of the MediaOne acquisition, or Dec. 15, 2000.

AT & T could also sell systems with close to 10 million subscribers to come into compliance, but analysts do not think this is a serious option for the MSO.

That deadline has Wall Street abuzz with the possibilities, with many analysts split as to what AT & T will ultimately do.

"Now the real fun begins," Janco Partners analyst Ted Henderson said. "They have six months to decide on how they come into [FCC] compliance. This [merger] puts them in a position asset wise where they can execute on [chairman] Mike Armstrong's vision for AT & T."

AT & T said June 5-the day it received the FCC's conditional blessing-that it would close the deal by Aug. 4. But many analysts expected the closing to drag out even further, mainly because of AT & T sluggish stock price, which is down more than 40 percent since it first announced the MediaOne deal in May 1999.

AT & T shares closed at $33.94 each, up 43 cents, on June 15, the day of the closing.

But because of that sluggish stock price, AT & T will have to pony up more cash to Media-One shareholders-$5.42 per share, or a total of $3.5 billion. According to the deal, Media-One shareholders will receive 0.95 shares of AT & T stock and $30.85 in cash for every MediaOne share they own. AT & T will also assume about $4.5 billion in MediaOne debt.

AT & T plans to issue about 606 million new shares of its stock and $23 billion in cash for the deal.

But while Wall Street expected AT & T to play a waiting game, AT & T was anxious to get the deal closed. And according to one company insider, no one expected AT & T's stock to rise anytime soon.

"You never have stock movement going upward when you have a deal pending," one AT & T source said. "I don't believe anyone inside AT & T believed that delaying the MediaOne closing would have caused a positive impact on the stock price."

And there was a danger that the stock would go even lower, which would have triggered a clause that would have further delayed the closing.

According to an AT & T source, if AT & T's stock dropped below $31 per share, it would significantly increase the cash component of the deal and force AT & T to go back to its shareholders for approval.

Analysts are split as to where they think AT & T will go regarding divestiture, with some opting for a Liberty spinoff and others leaning toward a divestiture of TWE.

Henderson said that although he does not rule out a TWE divestiture, he believes the easiest road for AT & T to take is a Liberty spinoff. However, that is contingent on receiving a favorable ruling from the Internal Revenue Service.

AT & T is keeping mum about its plans, but a spokeswoman said its decision will come within the FCC deadline.

"We have not made a decision," AT & T spokeswoman Eileen Connolly said. "We were offered a time period when we need to make a decision, but we are not going to speculate."

AT & T gained control of Liberty as part of its acquisition of Tele-Communications Inc. in March 1999. Liberty, which became a tracking stock of AT & T, was acquired in a tax-free merger. But according to IRS rules, AT & T could face a hefty tax bill-some say as much as $5 billion to $7 billion-if it divests Liberty before March 2001, the two-year anniversary of the Liberty purchase.

While that would seem to make a TWE divestiture more likely, Henderson said, AT & T needs to hold onto the TWE stake as long as possible as leverage for a telephony deal with Time Warner Inc.

Henderson argued that if AT & T negotiates to sell TWE right off the bat, this would put it at a disadvantage with Time Warner.

"If Time Warner is sitting there and saying, 'You have to get rid of this, and we're the only buyer,' that puts AT & T in a bad negotiating position." he said.

"It's desirous from an AT & T standpoint to be sitting down with Time Warner to negotiate restructuring the TWE partnership and a voice deal without any mandated requirement that they dispose of TWE. TWE becomes very strategic at the negotiating table if they are in compliance."

AT & T first reached a tentative telephony agreement with Time Warner in February 1999, but that deal was shelved after AT & T made its run for MediaOne. And it is likely that the deal will be tweaked further as Time Warner and AT & T continue negotiations concerning TWE.

The Yankee Group analyst Bruce Leichtman said it is likely that any Time Warner telephony deal will include an America Online Inc. component. AOL agreed to purchase Time Warner in a stock swap valued at $154 billion earlier this year. That deal is still pending.

"What hinges on that is some kind of AOL access," Leichtman said. "Having an AOL option for the high-speed service will certainly help AT & T in the long run and will help AOL [Time Warner Inc.] move beyond just their own properties. So there is some negotiating room there for AT & T."

Whatever the outcome of the negotiations, it is clear that AT & T is going to want more than just a telephony deal for its stake in TWE, which the FCC valued at between $14 billion and $18 billion.

AT & T also faces a daunting challenge in integrating MediaOne's operations into its AT & T Broadband unit, which currently has 32,000 employees. MediaOne has about 15,400 employees-a number that may be whittled down considerably.

Leichtman said the integration issues may not be quite as difficult as they were for AT & T's acquisition of TCI, mainly because Media-One already went through a telephone-company acquisition when it was created through the merger of regional Bell operating company U S West and Continental Cablevision Inc. in 1996.

AT & T would not speculate on layoffs, but MediaOne has a reputation for being top-heavy, which could lead to wide-scale cutbacks at its headquarters in Englewood, Colo., as well as at the field-operations level.

It is also likely that Media-One's top management-chairman Chuck Lillis, president Jan Peters and chief financial officer Richard Post-will leave the company shortly after the closing.

However, according to one MediaOne insider, their departure will not cause much of a stir within the company.

"It won't be anything like when [Continental chairman] Amos [Hostetter] resigned; like a death in the family," the MediaOne source said. "I don't think we've been a company long enough for people to feel like that."

The source added that AT & T has also helped in the transition by tying employee bonuses to performance and re-evaluating some earlier offers it had made to MediaOne workers.

"We have one guy who runs our telephony group, and they offered him a job that was three levels below what he is doing today," the source said. "He got about a zillion offers from the outside. But AT & T came back and made him a good offer."

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