AT&T DEAL TAKES SHAPE Defers Cable Tracking Stock, Unveils Telco Partners

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New York -- AT&T Corp. said last week that itwill retain Tele-Communications Inc.'s operations within its core business, deferring aplan to create a new stock that would reflect the TCI cable assets and other consumerbusinesses.

AT&T revealed that surprising shift last Friday, whenit released the proxy statement that will be sent to AT&T and TCI shareholders as partof their $48 billion merger. AT&T executives told analysts that they want to focus onintegrating TCI's operations and on creating new video-, phone- and data-service offeringsbefore dealing with the new stock.

AT&T also said it will effect a 3-for-2 stock splitwhen the deal closes, and it will buy back up to $4 billion in AT&T shares. Thecompany still plans to create tracking stocks for Liberty Media Group, which will be ownedby existing Liberty series A and B holders, notably TCI chairman and CEO John Malone.

And AT&T announced telephony joint-venture agreementswith five operators partly owned by or involved in existing system partnerships with TCI:Bresnan Communications, Falcon Cable TV Corp., Insight Communications Co., InterMediaPartners and Peak Cablevision.

The big name missing from that announcement was Time WarnerCable. AT&T and Time Warner are apparently continuing to iron out a deal that wouldgive AT&T access to that MSO's 12 million customers and 19 million homes passed.

Executives close to the process said the talks betweenAT&T and Time Warner are progressing.

"There's no anxiety that it won't happen," onecable executive said. "There's just impatience."

As expected, AT&T will conduct cable-telephony markettrials in 10 TCI markets this year, offering bundled voice, video and high-speed-dataservices. Two are in the San Francisco Bay area, and the others are Chicago, Dallas,Pittsburgh, Seattle, Denver, Salt Lake City, St. Louis and Portland, Ore. Most TCI marketswill offer local phone service in 2000.

AT&T and TCI also gave 1999 forecasts to Wall Streetanalysts. TCI's projection was for modest gains: Revenue and cash flow will increase inthe mid- to high-single-digits on a percentage basis over 1998; internal subscriber growthshould be about 1.5 percent to 2 percent; and its digital-cable-customer count should riseto 1.8 million, excluding partnerships.

AT&T said it expects 1999 earnings per share to beabout $4.20 to $4.30, ahead of analysts' average forecast. The TCI transaction shoulddilute earnings by about $1, assuming that the deal closes by the end of the firstquarter.

Overall, AT&T said, revenue in 1999 should grow by 5percent to 7 percent. Business services will grow by 7 percent to 9 percent, with strongdemand for data, local and wholesale services. Consumer long-distance revenue will fall 2percent to 4 percent, amid competition and rising use of wireless alternatives, AT&Tsaid.

AT&T executives -- including chairman and CEO C.Michael Armstrong, president John Zeglis and chief financial officer Daniel Somers -- andTCI president and chief operating officer Leo J. Hindery Jr. briefed Wall Street analystsand investment managers on the projections at a meeting here last Friday.

When the acquisition was announced in June, AT&T saidit intended to create a tracking stock for the cable operations and consumerlong-distance, wireless and data businesses. Then, early last week, TheWallStreet Journal and at least one telecommunications analyst reported that AT&Tplanned to tweak the cable tracking stock. AT&T intended to move consumerlong-distance operations out of the tracking stock, which would contain cable and consumerwireless operations in a unit run by Hindery, the Journal reported. MultichannelNews reported the contemplated asset shift in December.

One motivation behind the shift was to take consumerlong-distance services -- which generate earnings, but which are losing market share --out of a group of assets like cable, local telephony and high-speed data, which shouldgrow rapidly, but which won't generate near-term profits. Isolating those businesses, itwas argued, would make it easier for investors to choose between the stocks.

Now, though, AT&T plans to keep all of the cable,wireless and data operations -- including the control stake in At Home Corp. (parent of@Home Network) that AT&T is buying from Liberty -- as part of the AT&T stock.

In a prepared statement, Armstrong referred to the newassets that AT&T will employ under the merger, saying, "We have to be able tofully integrate these assets to deliver their true value to our customers. That's why wehave decided to consolidate our acquisitions before considering the creation of a trackingstock."

AT&T's statement also contained a quote from Maloneendorsing the move. "Making sure that these assets are operationally integratedbefore adding the complications of a separate tracking stock is the right thing todo," he said.

AT&T and TCI shares both traded up modestly lastFriday. But some cable executives questioned whether current TCI holders would be happylong-term owning AT&T, instead of what would have been designed as a growth stock --trading on cash flow, as opposed to earnings.

Janco Partners cable analyst Ted Henderson said he didn'tthink that the tracking-stock shift would affect shareholders of either company in theirvotes to approve the merger.

Over time, he added, AT&T may still create a trackingstock containing the cable assets.

"I think that shareholders ultimately expect thatbecause they are distinct businesses," he said. But for now, while AT&T is tryingto convince the Federal Communications Commission that the deal is good for consumers, thetracking stock was a layer of complexity that AT&T didn't need, he added.

AT&T said last week that Hindery will oversee all ofAT&T's cable-based businesses and run all cable activities, including investments incable affiliates and cable-telephony ventures. The consumer wireless business remainsunder Daniel Hesse, president and CEO of AT&T Wireless Services.

The cable unit remains part of AT&T Consumer ServicesCo., which is overseen by CEO Zeglis.

One cable executive close to Hindery said last week that hethought that running the cable businesses would be enough to keep the entrepreneurialHindery busy and happy.

"It allows him to be rather aggressive andacquisitive," the executive said. "I think that you're going to see someexciting stuff on the [telephony joint-venture] side - He wants to make his mark onthe launch of telephony over cable."

There are apparently many details still to be worked outwith the telephony affiliates, which bring about 5 million homes passed, including thosewithin joint ventures with TCI.

AT&T said it will own 51 percent to 65 percent of eachventure, and it will have exclusive rights to offer communications services to those cablehomes after making one-time payments based on performance milestones. The payments will bein "the tens of millions of dollars," AT&T said. Operators will also get ashare of monthly subscriber payments.

Operators must bear the cost of getting their plant readyfor two-way communications, but the venture will absorb the $300-to-$500 equipment cost towire a home for phone service over cable. The plan is to start testing later this year andto roll out commercial phone operations in 2000.

Many important points remain to be ironed out, though,including the allocation of capital costs, the revenue splits and how the AT&T-runventure will call on local operators' resources in the day-to-day fulfillment of serviceorders, an executive at one affiliate said.

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