AT&T, TCI call their analysts

Companies doing damage control in wake of merger

NEW YORK — AT&T and Tele-Communications Inc. went on the offensive Friday to turn around investor sentiment toward the telco’s $48 billion acquisition of TCI’s cable systems, holding a conference call with analysts to spin the deal.

AT&T chairman Michael Armstrong said on the conference call he wanted to “clean up … some very wrong information” that has spread in the past couple of days about the deal, to ensure Wall Street’s analysis was correct. The call was open to the press.

AT&T has been criticized in some quarters for paying an extremely high price for TCI’s systems, which are regarded as some of the worst quality and geographically scattered of any group of cable systems.

Not enough assurance

But the presentation from Armstrong, AT&T CFO Dan Somers and TCI president Leo Hindery outlining the rationale for the deal and giving more detailed financial information was not strong enough to prevent AT&T stock slipping again. It closed the day down $1.25 to $56.75 while TCI stock fell 56 ¢ to $38.68.

Since the deal was announced AT&T stock has fallen 13%, reducing the value of the offer by 12% to $44 a share. TCI stock has lost all the ground it gained in the days since the deal was announced.

The sell-off in AT&T stock largely reflects concerns about how the deal will hurt the telco’s earnings in the next few years. Armstrong admitted to analysts that earnings would be hurt for at least three years, but some on Wall Street are concerned the damage could last longer if AT&T pursues further cable acquisitions or has to spend more money than expected to upgrade TCI’s systems.

The rationale

AT&T is buying TCI to strengthen its competitive position against Baby Bells. AT&T hopes to use TCI’s cable wires into consumers’ homes to enable it to offer local telephone service.

But some media execs have been snickering privately at AT&T, noting that TCI’s cable systems are famous for their poor quality. One exec estimates AT&T will have to spend $10 billion to upgrade the systems to the quality necessary to offer telephone service.

“You are paying a huge price for the right to put a ton of money into assets that you have bought, to get them to be able to offer a rudimentary telephone service which will take a few years,” said one skeptical investment banker.

TCI president Leo Hindery, noting TCI did not have “seller’s remorse,” rebutted questions about the capital expenditure needs of the systems. He told the analyst call that the $1.8 billion of capital spending TCI has already budgeted will be enough to get its cable systems to the standard to offer “all the telephony applications that Mike has laid out.”

Lehman Bros. analyst Larry Petrella says the $10 billion upgrade number is far too high but he estimates TCI will have to spend $5 billion to get its systems to the point where telephone service can be offered.

Certain assumptions

What may raise more questions from the call were AT&T’s assumptions about the potential synergies generated by the deal. Somers told the analysts that a total of $3.4 billion in extra revenue and $2.2 billion in extra cash flow — earnings before interest, taxes, depreciation and amortization — could be generated by a range of synergies such as lower customer “churn” and higher penetration of cable subscription brought by AT&T’s marketing prowess.

TCI’s cash flow last year was $2.975 billion, however, so Somers’ assumptions suggest the deal will almost double the cabler’s cash flow. One analyst said the assumptions appeared questionable.

Armstrong also tried to downplay concerns about AT&T’s intention to do further cable acquisitions. TCI only gives AT&T access to at best one third of customers’ homes, so it will have to either buy or affiliate with cablers across the country to have a national footprint.

Armstrong told the call there were many different ways of affiliating with cablers to ensure access for telephone service, but he did not rule out future acquisitions.