AT&T Corp. last week stepped outside of the telecommunications industry to buy the nation’s second-largest cable company, Tele-Communications Inc. The move is the latest in a string of mega-mergers involving communications companies.
The stock transaction, valued at $48 billion including debt, is thought mainly to give AT&T its highly sought-after presence in the local telephone market, but it also could have an impact on AT&T’s wireless business.
Analysts say the partnership would allow AT&T to market its wireless and long-distance products to TCI’s large base of cable customers, either through interactive promotions via customers’ televisions or during service calls. TCI’s cable lines pass about one-third of all U.S. households, said the companies.
AT&T also can leverage its research and development of wireless local loop systems as another last-mile alternative for entering homes and businesses, although analysts are still out on the question of whether AT&T’s WLL development is up to speed.
Wireless services likely will become part of a bundle of services the companies will offer to customers, including local telephone, long-distance, entertainment and Internet services. AT&T’s bundling strategy so far has been nascent, said John Bensche, a telecom analyst with Lehman Brothers.
“They’re just beginning to assemble the pieces,” he said. “They have long-distance. They have wireless. They didn’t have local, and they didn’t have video.
“This deal will make them the pre-eminent facilities-based bundler,” continued Bensche. “The market hasn’t yet spoken as to whether or not bundling will be the silver bullet to compete in the future.”
AT&T said it will combine its long-distance, wireless and Internet services units with TCI’s cable, telecommunications and high-speed Internet businesses to create a new subsidiary called AT&T Consumer Services. The company will trade as a “letter” or “tracking stock” on the New York Stock Exchange.
In order for AT&T to get the maximum value from the deal, however, it will have to spend money to further TCI’s efforts to upgrade its cable facilities to support two-way transmissions needed for digital telephony and data services.
Some industry experts contend upgrading a cable network to two-way capability is not worth the effort.
When the Federal Communications Commission announced it would auction spectrum for PCS, cable companies were expected to be big players in the PCS business. Sprint, TCI, Cox Communications Inc. and Comcast Corp. formed the Sprint PCS venture in 1994. Part of the venture’s original plans were to offer local telephone service via the cable network but that vision changed in 16 months into the deal.
Today, Sprint’s only PCS effort via the cable network is in Southern California as part of Cox’s pioneer’s preference license.
Indeed, it is expected the cable companies will exit the Sprint venture. TCI, Cox and Comcast are scheduled to receive an interest in a new stock that tracks Sprint’s wireless operations in exchange for their interests in Sprint PCS and PhillieCo.
But news of TCI’s tie-up with AT&T had some wondering if AT&T could be in violation of spectrum cap rules via TCI’s interest in Sprint, or ironically whether AT&T could eventually hold an interest in one of its biggest rivals.
AT&T said it would be open to future agreements with cable companies. Analysts say other telecommunications companies could be looking to partner with cable companies as well.
Brad Busse, chief operating officer at Daniels & Associates, said, “I wouldn’t be surprised to see other transactions, although I don’t think this is necessarily a trend.”
Nevertheless, local phone and data services-not wireless-were the impetus behind AT&T’s offer to buy TCI.
“Sprint set the bar with their recent announcement that they would offer high-speed data services,” said Richard Siber an analyst with Andersen Consulting. “Sprint has local, long-distance and a strong wireless presence, and they have been able to do this all on their own.
“AT&T had to do something to catch up,” said Siber.
“Just because AT&T bought TCI does not give them an insurance policy, though. It gives them another revenue stream, and what they do with that investment ultimately will determine their success,” he said.
“This is definitely a landmark event,” said David Kerr, director of wireless programs at Strategy Analytics. “AT&T realizes that it can’t just be in the phone business. It has to be in the infrastructure and entertainment business too. It gets AT&T back on track.”
AT&T said it expects the transaction to close by the first quarter of next year, although analysts say it could take up to a year to close.
Last week’s announcement sent cable stocks soaring while all of the regional telephone companies and AT&T saw their stock slide. The regional telcos see the deal as a signal they should be allowed to enter the long-distance and data markets from which they are forbidden to enter until they open their local markets to competition.
U S West Inc., a company that presumably will compete with a combined AT&T/TCI in the local arena, said, “Federal regulators need to act swiftly to drop restrictions that are keeping U S West from fully serving customers in markets such as long-distance and data networking. All of us should be allowed to compete, now that the biggest kid on the block just got bigger.”
