AT&T Buys Back Stock with Cable Systems

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AT&T Broadband & Internet Services kicked off what
could be a long line of system sales or swaps last week, agreeing to deliver 495,000
subscribers to Cox Communications Inc. for $2.8 billion in Cox-owned AT&T Corp. stock.

Cox will exchange more than 50 million shares of AT&T
stock that it owns for the systems, which are located primarily in Tulsa, Okla., and Baton
Rouge, La.

In addition, Cox will acquire Peak Cablevision, a
partnership between AT&T and the Fisher family, as well as AT&T's 20 percent joint
venture with TCA Cable TV Inc.

Cox agreed to buy TCA last month in a deal worth $4
billion.

Cox also gets about $750 million in cash and "other
consideration" -- primarily the assumption of a small amount of Cox debt by AT&T.

Based on AT&T's closing price of $56.63 per share July
6, the deal works out to about $4,230 per subscriber. Merrill Lynch & Co. advised Cox.

The deal, word of which leaked during the National Show
last month, could prove to be the first in a series of swaps that AT&T plans in order
to pare down its subscriber base to appease regulators reviewing its proposed merger with
MediaOne Group Inc.

AT&T submitted the MediaOne proposal to the Federal
Communications Commission last Thursday.

In order to comply with the FCC's now-suspended attribution
rules -- which prohibit a single cable operator from controlling more than 30 percent of
cable subscribers in the country -- AT&T has been scrambling to divest many of the
cable partnerships it inherited from Tele-Communications Inc.

According to several analysts, AT&T has said that it
wants to consolidate 90 percent of its operations in the top 25 markets in the country.
Analysts said it is AT&T's intention to hold on to just three partnerships -- Insight
Communications Co., Time Warner Entertainment and Cablevision Systems Corp.

Several analysts believe the next moves for AT&T could
include deals with Charter Communications for systems in the New England market and with
Adelphia Communications Corp. for AT&T systems in western New York.

And although the Cox deal helps AT&T to shed a healthy
number of subscribers and to regain a large chunk of its stock in the meantime, the
Atlanta MSO benefits, as well.

Cox has had its eye on the Tulsa system for quite a while
-- it had planned to form a joint venture with TCI for the property last year, but that
deal was scrapped after AT&T made its offer to buy TCI.

Coupled with its existing systems in Oklahoma City,
Louisiana, Texas and Arkansas, the deal creates a regional supercluster with 1.7 million
subscribers for Cox.

"This fits our operating strategy of clustering and
maximizing the value of the significant nonconsolidated investments we have," Cox
spokesman Anthony Surratt said.

Cox received the AT&T shares as part of its involvement
in Teleport Communications Group, a competitive local-exchange carrier that was sold to
AT&T last year.

The Tulsa system has about 160,000 subscribers, and it is
located near an existing Cox system in Oklahoma City with about 125,000 subscribers. The
Baton Rouge system, with about 156,000 subscribers, adds to existing Cox properties in New
Orleans and Jefferson Parish in Louisiana.

In addition, Cox receives about 117,000 subscribers from
Peak Cablevision in Oklahoma, Arkansas, Utah and Nevada. Daniels & Associates Inc.
said it advised Peak.

PaineWebber Inc. vice president of research Thomas Eagan
said the deal was a good one for both companies. Although he added that the price could be
considered a little high, it is in line with the condition of the systems.

"This deal makes complete sense," Eagan said.
"AT&T is using its reservoir of subscribers to swap other assets -- the $2.8
billion in AT&T shares that it obviously wants to get back."

He added, "The price kind of makes sense. Obviously,
these are not great systems, which is why they didn't trade at $4,600 [per subscriber].
They're probably decent systems. And it gives Cox a pretty decent large cluster in the
south central part of the United States."

SG Cowen Securities Corp. analyst Gary Farber also liked
the deal, adding that it shows that cable companies continue to hold their value,
especially in light of recent court decisions that could force MSOs to open their
high-speed networks to competition.

"From an industry perspective, it's more
positive," Farber said. "This is greater affirmation that in the post-Portland
[Ore.] ruling environment, this is pretty valuable plant."

The deal did not include a telephony agreement, which
AT&T has been attempting to strike with Cox and other MSOs. Cox has admitted that it
has been in informal negotiations with AT&T regarding telephony, but it doesn't appear
that any deal is imminent.

"We would be open to talking to AT&T about a local
carriage agreement for telephony," Surratt said. "The interest is on carriage
that makes sense to us financially."

Cox has been successful with its own branded
switched-telephony service -- it currently has about 60,000 subscribers -- so rushing into
a telephony deal is not a top priority for the MSO.

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