AT&T Wins MediaOne Bid

AT&T has won the tug-of-war for popular cable operator MediaOne but its rival in the bidding, Comcast, is walking away with some nice consolation prizes.

Comcast struck a deal late Tuesday with AT&T to pull out of the bidding in exchange for some coveted cable systems. AT&T, whose initial $62 billion bid trumped Comcast's $48 billion offer, will swap cable systems that could result in Comcast gaining an extra 2 million customers and AT&T receiving up to $9.2 billion.
Comcast will also receive a $1.5 billion breakup fee from MediaOne.

If the deal is successful - federal regulators are sure to take a hard look - AT&T would gain cable access to about 60 percent of American homes and become the largest U.S. cable provider. Earlier this year, it concluded a $59 billion purchase of Telecommunications Inc., the second largest cable operator.

"It's no surprise AT&T won the battle over Media One. They needed it more than Comcast did," said Jeffrey Kagan, an independent telecommunications analyst based in Atlanta. "AT&T needs the deal, Comcast just wanted it for growth."

AT&T (T) shares jumped 4 5/16 to 55 7/8 in midday trading Wednesday. MediaOne (UMG) dipped 1 to 76 5/8. And Comcast (CMCSK) surged 4 3/4 to 71 7/16.

Comcast has also agreed to offer AT&T-branded phone service "in an expedited basis" as soon as AT&T concludes separate deals with two other non-AT&T affiliated companies.

The companies said the swaps were designed to improve each company's geographic coverage.

"This transaction makes strategic sense for both companies," said AT&T Chief Executive C. Michael Armstrong. "Geographic clustering enables more effective telephony competition."

Brian L. Roberts, president of Philadelphia-based Comcast, said the deal would bolster the company's cable presence, giving it more than 8 million subscribers. He added that the deal will allow Comcast to provide new products to its customers.

"This is a different outcome than our MediaOne proposal, but it is an elegant win-win result," Roberts said.

Time had been running out for Comcast in its effort to find allies to top AT&T's $62 billion bid. MediaOne's board accepted the offer on Saturday, giving Comcast until Thursday to counter.

The payment would include $30.85 in cash and $56.525 in AT&T stock for each MediaOne share. Ma Bell will also assume several billion dollars in debt. As a further enticement, AT&T promised to pay an additional $3.5 billion if its shares traded below $51.30 in order to protect MediaOne shareholders.

Earlier this week, America Online backed off an alliance with Comcast because of the financial demands it would impose. AOL fears that AT&T's control over cable lines will hinder its plans for high-speed service. Cable is eventually expected to replace phone wiring as the conduit for Internet service because of its superior speed and capacity. (Editor's note: CBS News is the broadcast news provider for Aerica Online.)

Microsoft, also a Comcast ally, was also discussing ways to help, but is likely to strike its own side agreement with AT&T that reportedly could include a $5 billion investment in Ma Bell.

In exchange, AT&T would choose Microsoft software to run the set top boxes that will control the new telecom services entering the home via cable wiring. Microsoft was fearful AT&T would choose software from rival Sun Microsystems.

Both companies declined to comment.

Another telecommunications giant, MCI WorldCom, also briefly considered jumping into the fray.

Despite the swirl of speculation about large technology rivals coming to Comcast's aid, industry analysts had doubted AT&T would allow itself to be outbid. Yet the truce means Ma Bell will end up with 40 percent fewer cable customers than it had hoped to gain with its purchase of MediaOne, the fourth largest U.S. cable operator with 5 million subscribers.

AT&T has bet its future on the ability of cable wires to deliver all kinds of lucrative new services, including local phone and high-speed Internet. Ownership of cable would also allow Ma Bell to bypass the local-phone monopolies of its Baby Bell offspring and avoid costly access charges, which comprise up to 40 percent of a customer's long-distance bill.

Still, AT&T has had to spend more than $110 billion to acquire the cable systems, and will have to spend billions more to upgrade them to handle phone calls. And it'll be several years before the moves start to pay off.

AT&T is moving into cable in the hopes of offering lucrative new services because of a decline in its mainstay consumer long-distance business, the profits of which have been sharply eroded by competition. With more competition on the way, that business was likely to continue to fall.

Written By Jeffry Bartash, CBS MarketWatch