AT&T Adds Fuel to Cable Fire


The deal-driven cable-stock rally heated up again last
week, when AT&T Corp. agreed to buy Tele-Communications Inc.'s cable assets for
an estimated 13 times next year's cable cash flow.

The MSO group has enjoyed a sustained run-up since the
middle of last year, fanned at intervals by deals like Microsoft Corp.'s $1 billion
investment in Comcast Corp., TCI's systems-for-stock swap with Cablevision Systems
Corp. and Paul Allen's high-multiple buyout of Marcus Cable Co. L.P.

The AT&T deal is more of the same. AT&T paid a
premium -- 37 percent, according to Goldman Sachs & Co. analysts -- and praised to the
skies the broadband platform that operators have spent billions of dollars to build and
upgrade. AT&T believes in telephone service delivered over the cable plant -- a
revenue source that barely figures into analyst estimates today.

AT&T also expects to speed up TCI's upgrades,
meaning more near-term cash for equipment vendors, the stocks of which also rose last

And AT&T wants to cut deals with other operators with
plant that covers the remaining two-thirds of the U.S. cable universe. That juiced other
MSOs that are seen as possible takeover candidates -- notably Cablevision, of which TCI
already owns one-third, and Adelphia Communications Corp.

The deal also gives large MSOs like Comcast, Cox
Communications Inc. and MediaOne more incentive to combine -- a theory advanced by Merrill
Lynch & Co. analyst Jessica Reif Cohen last week -- because scale is obviously
attractive. Comcast executives privately crowed again about their recent deal with BCI
Telecom Holdings Inc. (BTH) that will eventually let Comcast buy control of Jones
Intercable Inc. for "only" about 10 times 1999 cash flow.

"Eyeballs matter, so [MSOs] could be better off really
consolidating and getting a true premium," Cowen & Co. cable analyst Gary Farber
said. He thinks that there could be more intramural deals done in the near term than
further acquisitions by outside players like AT&T.

Sanford C. Bernstein & Co. analyst Tom Wolzien noted
that the Telecommunications Act of 1996 limited individual-company ownership to about 30
percent of cable households, although that provision is under review. AT&T figures
that TCI -- along with its shares of affiliates, including Cablevision -- reaches into 33
million homes.

"People who are looking for AT&T to buy out
everybody under the sun -- I think that's unlikely," Wolzien said. "I think
that they'll do some supply deals with people, but that's not the same thing. I
think [TCI chairman and CEO John] Malone got in here and got a lot of the good

MediaOne chief financial officer Richard Post thinks that
AT&T is unlikely to stop with TCI, though.

"As AT&T, what you're trying to protect is
the national [long-distance] footprint and the national brand, before it withers on the
vine. I don't know how you do that by stepping into the water one-seventh of the

Post also said AT&T might not be the only buyer.
Worldcom Inc., which is buying MCI Communications Corp., could enter the market.

"I'll bet that there are a lot of strategic
meetings going on [at companies] wondering why they didn't do this already." Of
course, U S West Inc. was the last outside buyer to make a big play for cable, buying
Continental Cablevision Inc., which eventually led to the split-up between U S West and
MediaOne Group (parent of MediaOne, formerly Continental).

Cablevision -- up a whopping 37 percent from last
Monday's close to last Thursday's close -- seemed to benefit from more than just
the TCI-AT&T connection. Several analysts, including Goldman's Barry Kaplan,
noted that even with a huge run-up over the last 18 months, Cablevision still trades below
other MSOs on a multiple basis. Applying a 13 multiple to 1999 cash flow, Cohen set a
$105-per-share target price.

Adelphia, up 12 percent after some profit-taking last
Thursday, also ranked high on some analysts' takeover lists. Adelphia executive vice
president Timothy Rigas said last week that it was "good to be thought of that way.
It makes you think that you've put together the right assets, whether you do
something about it or not."

Aside from deals like AT&T-TCI, many cable analysts had
forecast a quiet period for MSO stocks, as investors look ahead to the second half of the
year for some tangible results from new services such as digital video and high-speed-data

Most cable analysts were restating their recommendations
last week -- even the ones who cautioned against expecting more near-term blockbuster
acquisitions. Furman Selz LLC analyst Frederick Moran did advise investors in a report to
"trade other cable stocks aggressively near-term," because prices will run up
amid takeover speculation. He maintained a "buy" mark on TCI, but he said he
would cut it to "hold" if TCI traded up near the $51-per-share price that
AT&T agreed to pay.

Interestingly, TCI ended last Thursday at $39.25, although
it rose to as high as $44 Wednesday.

Farber said he still thinks that the MSO stocks are
attractive because "the fundamentals are solid." In other words, subscriber
growth is steady despite rate hikes; competition has boiled down to direct-broadcast
satellite; and the threat of new regulation appears to be modest. At the same time, the
upside from new services seems more solid than ever.

"The biggest hurdle to get around is the
valuations," Farber added, referring to historically high stock prices. "And
that really comes down to how big you think the markets are for these new services."

The deals continue to help cable stocks, but the
performance of new services and the resulting cash-flow lift could ultimately matter more.