The big deal that wouldn't die finally happened -- andJohn Malone promised that it will close, too.
AT&T Corp. decided that the best way to bypass theBells and to grab local customers was to buy Tele-Communications Inc.'s cablebusiness, in a deal valued at about $48 billion in stock, assumed debt and cash.
Since his first days on the job in November, AT&Tchairman Michael Armstrong apparently wanted to partner with TCI chairman and CEO Malone.Armstrong flew to Englewood, Colo., to talk it over during his second week at AT&Tand, along the way, they discussed a variety of options, including a failed attempt tomatch-make a marriage of cable high-speed-data services and AT&T.
"This was always the best idea," Armstrong toldanalysts in New York after announcing the deal last Wednesday. In fact, he said,"there really wasn't any alternative, to be honest. I can say now that thedeal's done."
Malone -- whose sights will shift to control of LibertyMedia Group and TCI Ventures Group -- vowed that this merger won't crash and burn,like his 1993 deal to sell TCI to Bell Atlantic Corp.
And while Malone's TCI holdings will rise to, by hisestimate, $1.8 billion when the deal gets done, he said he also backed his play with a$240 million purchase of TCI shares last week.
"I'm betting very substantially personally thatthis will be a very successful financial investment, long-term," Malone said at a NewYork press conference.
Malone will leave TCI having extracted $5.5 billion intax-free cash from AT&T for his new deal vehicle: a combined Liberty Media Group andTCI Ventures Group, under the Liberty name. That comes from Ventures selling to AT&Tits controlling stake in @Home Network, the National Digital Television Center and WesternTele-Communications Inc. ($2.5 billion); and AT&T's own stock, which will comewhen an earlier deal to sell Teleport Communications Group closes ($3 billion).
Malone's move to the enlarged Liberty should help toensure the deal's health by averting an ego clash such as what happened with BellAtlantic chairman Ray Smith, analysts said.
"The message was clear to me: Malone is ready to stepaway," Salomon Smith Barney high-yield analyst Stevyn Schutzman said.
Malone and TCI president and chief operating officer Leo J.Hindery Jr. -- whom Malone hired in February 1997 to help right a listing ship -- saidthey felt that TCI needed help expanding into telephone and other two-way communicationsservices.
Hindery said TCI believed in its strategy, which includes abig push into residential telephony using new Internet-protocol technologies.
"It was the implementation about which we had grownsomewhat concerned," he said.
Under the merger plan, Hindery would become president andCOO of the planned AT&T Consumer Services Co., serving under current AT&Tpresident and COO John Zeglis.
AT&T Consumer Services will combine the cableoperations and high-speed-data services with AT&T's residential long-distanceofferings, dial-up Internet access, wireless networks and, when available, IP-based localphone service. This would create a company that would be measured by its cash-flowperformance. Armstrong said it would generate $7.5 billion per year in cash flow from $33billion in annual revenue
That company will be separated from the"wholesale" network-services operation, which serves business customers, bymeans of a new tracking stock. The wholesale arm would be a profitable, dividend-payinginvestment, generating $36 billion in annual revenue and $12 billion in cash flow.
AT&T said it hadn't yet determined exactly how thenew stock would be distributed to existing AT&T holders.
As Malone said last week, Armstrong, who was chairman andCEO of General Motors Corp.'s Hughes Electronics Corp. subsidiary, is probably"the guy that, next to me, knows [the most] about tracking stocks and theirappropriate use for shareholder value."
AT&T will acquire TCI Group's stock by issuing newAT&T shares and exchanging them at a ratio of 0.7757 shares of AT&T stock for eachshare of TCI Group Series A stock and 0.8533 shares of AT&T for each share of TCIGroup Series B stock. The premium paid for the supervoting B shares, controlled by Malone,has already prompted a lawsuit filed by a Series A holder last week in Delaware ChanceryCourt.
The equity portion of the deal worked out to nearly $51 perTCI share when it was announced, or about $31.8 billion in AT&T equity.
AT&T will also assume about $11 billion in TCI debt andbuy the $5.5 billion in assets from Liberty.
For that, AT&T will buy broadband access to millions ofhomes. After TCI closes pending system deals, its cable plant will pass about 16 millionhomes, and it will be hooked up to some 10.5 million customer homes.
TCI also owns stakes in other MSOs, including CablevisionSystems Corp., and it is involved in joint ventures. AT&T considers those stakes topresent at least theoretical access to another 17 million homes and 10 million currentcable customers, giving it a total of about one-third of all U.S. homes.
That's a big bite, but far short of the nationwidelocal access that AT&T craves. Armstrong said AT&T wants to align with other cableoperators, and it is working on fixed-wireless-local-loop service that would useAT&T's extensive wireless spectrum.
Hindery said MSOs within TCI's affiliate camp were allexcited about the prospects of tapping AT&T's capital and branding for phoneefforts. Those deals could be worked out as equity or franchise deals, but Hindery said hesuspects that they will be widespread.
Executives at two MSOs that haven't committed totelephone deployment yet agreed that AT&T could be a big help in introducing phoneservice.
"This transaction says to us that AT&T firmlybelieves that there's a business opportunity for them in the local loop, andit's the ultimate endorsement of the cable network into the home," said ComcastCorp. senior vice president John Alchin. "If you're going to be in the localtelephone business, what better partner to have than AT&T?"
"Certainly, if you have adjacent systems, given theirplans and their branding, it may make sense to join forces in a given market,"Charter Communications Inc. president Jerry Kent said.
Adelphia Communications Corp. executive vice presidentTimothy Rigas -- whose MSO has a business-telephone unit and is testing residential-phoneservice -- agreed that AT&T could help to drive cable telephony.
"I would think that it would leave the door wide opento explore telephone strategies that AT&T, Cox [Communications Inc.] and others havestarted," Rigas said. "This is a win-win for everyone in the industry."
If AT&T and TCI help to get IP-telephone serviceestablished, that helps the rest of the cable industry, too, InterMedia Partners generalcounsel Bruce Stewart added.
InterMedia is one of the affiliates in the 17 million-homecamp cited by Armstrong. Stewart said InterMedia, as an affiliate, was thrilled that"a substantial investor in our company has made such a bold strategic move with thepre-eminent telecommunications provider."
But getting TCI's plant ready for IP-phone servicewon't be cheap or come especially fast. AT&T figures to accelerate TCI'sexisting plan to spend about $1.8 billion over the next three years to enable two-wayservices across its entire footprint. But, as Hindery said, there are limits to how muchfaster that labor-intensive work can be done.
MediaOne Group chief financial officer Richard Post -- whosaid his own company's talks with AT&T snagged over which potential partner wouldown which business opportunities -- guessed that it would cost at least $5 billion to getTCI's major markets fully ready for two-way services.
"AT&T brings them the financial strength to doit," he added.
Near-term dilution and concerns about longer-term capitalcosts drove down AT&T's share price last week, from $65.25 at last Tuesday'sclose to $58.56 at Thursday's close.
Regional Bell operating company stocks also took some hits,although Bell Atlantic and other RBOCs immediately argued that the deal would create a bignew local-phone competitor, and that it should prompt regulators to speed the Bells'entry into the long-distance business.
Bear Stearns & Co. telecommunications analyst WilliamDeatherage said in a report that the AT&T-TCI deal should make those approvals easierto get, adding, "The sheer size of the [AT&T-TCI] combination" makes it hardto argue against approving the pending SBC Communications Inc. merger with Ameritech Corp.