Telco giant AT&T is to acquire the nation’s biggest cable operator, Tele-Communications Inc., for roughly $43 billion, sources said Tuesday in what will be the biggest buyout in media history and one of the largest takeovers in any industry.
|TCI deal may spur copycat ventures
The staggering deal, expected to be announced today, will give Ma Bell direct control of the cable wires running into consumers’ homes, making it competitive in this arena with Baby Bells like Bell Atlantic which have been gearing up to invade AT&T’s long distance market.
TCI gives AT&T cable systems serving 13.5 million customers scattered around the country although system sales already negotiated but not completed would reduce that to just over 10 million customers. AT&T, in contrast, now sells long distance telephone service to 90 million customers.
The deal is also sure to shake up the cable industry, accelerating one final round of consolidation, Wall Streeters said Tuesday. And it will make TCI chairman and major shareholder John Malone a wealthy individual, as he is cashing out his supervoting stake for about $3 billion.
While details of the transaction were sketchy late Tuesday, AT&T was said to be offering $50 a share for TCI’s cable company, or roughly $31 billion for TCI’s outstanding stock in equity. Additionally the telco will have to assume the cabler’s debt of about $12 billion, lifting the value of the deal above $40 billion.
Neither TCI nor AT&T would comment late Tuesday.
TCI and AT&T stock soared late Tuesday, as did other cable stocks, on rumors of a deal. TCI closed up $3 to $38.68 while AT&T rose $2.31 to $65.37.
Sources close to the negotiations said the deal is highly complicated but only covers the cable systems, excluding TCI’s Liberty Media programming arm and the TCI Ventures investment vehicle. Malone has gradually restructured TCI in the past few years, with programming and investments spun off into separate divisions with their own stocks, facilitating purchase of the cable systems.
While Malone will cash out of the cable systems side, he retains control of Liberty and TCI Ventures — an important point for Hollywood players like USA Networks Inc. chairman Barry Diller and News Corp. chairman Rupert Murdoch who are in business with Malone through Liberty.
AT&T, in contrast, only wants TCI’s cable systems. Since Michael Armstrong became chairman of the long distance telco last year, AT&T and TCI have been negotiating across a range of issues including an investment by the telco in the cable giant to finance upgrades of its systems.
Armstrong took charge of an embattled AT&T, which has been steadily losing market share in recent years to competitors like MCI.
Deregulation of the telecommunications business in 1996 raised the specter that local telcos could also attack AT&T’s market. The Baby Bells have in fact been consolidating in preparation for such an attack.
Ma Bell, as AT&T was once called, lost direct access to consumers’ homes after the 1984 breakup of the phone system divided long distance from local telephony. It has long wanted to find a way to get into consumers’ homes so it could offer local telephone service without having to lease lines from the local Baby Bell companies.
The emerging use of Internet telephony made the cable systems’ lines particularly attractive. Cable systems have become an increasingly popular way for consumers to access the Internet, while telephone services using the Internet have also become increasingly common.
How regulators will respond to the deal isn’t clear, as most regulatory officials in Washington had not heard anything about it when contacted late Tuesday. Initial reaction, however, suggested opinions will vary (see separate story, page ).
The deal is believed to have a structural wrinkle that enables it to get done without transfer approvals from every municipality overseeing TCI’s cable systems, removing one major regulatory layer that could have delayed approval by months.
AT&T is believed to have long been negotiating an investment in TCI as part of a joint venture plan relating to Internet telephony, Wall Streeters said. But one of the obstacles to such a deal was that it would not guarantee the telco access to homes, whereas buying the cabler outright would, said one Wall Streeter Tuesday.
“It makes sense. It may be AT&T’s best option to do something with cable rather than building their own (local networks) or reselling the Bell plant,” said Lehman Bros. analyst Larry Petrella.
“TCI affords (AT&T) a direct connection to the local consumer,” said an industry exec. “TCI gets the exceptional promotional and customer base of AT&T. AT&T gets TCI’s hard wire into everybody’s home. It’s a distribution play, not a content play.”
The combined company can bundle cable and telephone services as well as high-speed Internet access. “They’re looking at it in terms of offering a full package of services to the consumer and potentially the business market,” said one observer.
For Malone, the deal comes almost five years after he first tried to cash out of cable with the 1993 sale of TCI to Bell Atlantic. That deal, which prompted a rash of link ups between telcos and cablers, fell apart a few months later as the Federal Communications Commission began re-regulating cable rates.
This latest deal could not have come at a better time for Malone. After a long slump which began with the rate re-regulation and which continued as investors feared the impact of telcos and satellite TV companies invading cable’s turf, cable stocks have soared in the past year as perceptions of the value of cable systems have firmed and as the long-running bull market has risen to new heights.
TCI’s stock has jumped from a low of $14.12 to as high as $39.37, driven both by improving sentiment toward the cable sector and growing confidence that a restructuring put in place by newly appointed TCI president Leo Hindery was having an impact.
Hindery cleared out much of TCI’s management team and began pruning the company’s far-flung cable systems, selling blocks of systems to other cable operators in exchange for stock.
At the same time a new round of cable consolidation has been gathering pace in recent weeks, with Paul Allen buying Marcus Cable for $2.8 billion and Comcast buying into Jones Intercable in a deal expected to give it control of Jones within two years.
C3 CEO Richard Frank said, “The (AT&T-TCI) deal makes sense if you believe in the eventual convergence of telephone service through cable, and if you believe that all this data will go through high-speed wires.”
Unlike four years ago, when many telco-cable deals came and fell apart, “the infrastructure is now there to have it happen,” Frank added. “The government is allowing the Bells to merge with one another. There are larger blocks of companies.”
“AT&T is looking for a way to expand,” he said. “AT&T has always been fighting on the margin, selling only price, like 10 cents a minute. That’s a losing game. Now they can tie together services and disguise the cost by selling cable, local phones services, long distance and Internet access. If you’re looking to package services, there’s not much of a better name than AT&T.”
Jenny Hontz contributed to this story