Washington -- AT&T Corp. chairman C. Michael
Armstrong went on record in Congress last week, saying that double-digit stock-price
declines that were giving some AT&T investors the jitters would not sink its $48
billion merger with Tele-Communications Inc.
"The deal is done. The deal will go through, pending a
shareholder vote," Armstrong said in testimony last Tuesday before the Senate
Judiciary Subcommittee on Antitrust, Business Rights and Competition.
Those soothing words bolstered AT&T's stock, the
decline of which since the merger announcement has led to repeated reassurances from both
companies about the soundness of the deal.
Share prices in both companies held firm last week --
AT&T's $57.50 closing price last Thursday was 12 percent below its June 23 mark,
while TCI's $39.38 price was up less than 2 percent from June 23. (As of last Friday
morning, AT&T had slipped some more, to $56.88, while TCI had risen to $39.50.)
Armstrong said last Tuesday that he wasn't surprised
that his company's stock price skidded after it agreed to buy TCI for an announced
$48 billion in cash and assumed debt.
Asked point-blank by subcommittee chairman Sen. Mike DeWine
(R-Ohio) whether he knew that the stock would skid, Armstrong replied, "Yes, we
Armstrong said the sellers were institutional owners that
treated AT&T like a utility stock, and they no longer viewed it as a reliable source
"So we are transforming AT&T from a utility,
no-growth company to participate in a huge, growing, technology-driven industry called the
communications industry," Armstrong said. "For every one of the sellers,
there's a buyer who believes in that growth."
He added that transforming AT&T into a growth story
would inevitably lead to some churning of AT&T shares.
Armstrong said AT&T was committed to offering
competitive local phone service first to TCI's 10 million cable subscribers, and then
to AT&T's 66 million long-distance customers, through wireline services, wireless
services and resale of incumbent phone-carrier services.
"With the TCI merger, we have just begun,"
A securities filing last week containing the merger terms
showed that either company could terminate the merger agreement if the deal doesn't
close by March 31, 1999, under certain conditions. That date could get pushed back until
June 30 or Sept. 30, 1999, under other conditions, including a court order blocking the
deal or a delay in winning shareholder approval.
The agreement provides for a $1.75 billion fee to be paid
to either company if the other backs out of the deal.
TCI shareholder approval is assured, since chairman and CEO
John C. Malone agreed to vote his 48 percent of equity for the merger.
Concerns about whether the deal would pass muster with
AT&T's more conservative, earnings-and-dividend-minded shareholders prompted
speculation about how AT&T will handle the distribution of tracking shares in the
planned AT&T Consumer Services Co., including the cable and residential long-distance
The idea is that AT&T shares would reflect the earnings
of the business- and network-services company, while the Consumer Services shares would
track the cash flow generated by the more capital-intensive residential side of the
AT&T hasn't spelled out the distribution details
yet, except to say in general terms that shareholders will be allowed to exchange AT&T
shares for shares in the new tracker to minimize dilution.
TCI president and chief operating officer Leo J. Hindery
Jr. was quoted in the July 3 edition of the Los Angeles Times as saying that
ownership of the new tracking stock could be mostly independent of the current AT&T
stock. AT&T and TCI spokesmen backed away from such speculation later, saying that
current AT&T holders would own a substantial amount of the new tracking equity.
Cable analysts said it would take a while for investors to
get a fix on how valuable the new Consumer Services stock will be versus the increased
capital cost and execution risks for AT&T.
"It's a company clearly in transformation, and
the market hasn't figured out how to value the thing yet," Credit Lyonnais
Securities USA cable analyst Richard Read said. "Everything says this is a time for
there to be inefficiencies in the market."
As an example of the valuation problems, Read said,
investors can't simply take the business-services side of AT&T, estimate its
earnings and value it at 20 times net income, because that would give no value to Teleport
Communications Group, the competitive local-exchange carrier that AT&T is buying for
$11 billion in stock. TCG loses money, but it clearly has value, and it is at the center
of AT&T's facilities-based offering to businesses.