AT&T Corp. is buying the nation's second-largest cable TV provider in a stock swap worth as much as $48 billion. The deal, which includes $16 billion of TCI debt, would create a colossal telecom company.
"This is an exciting beginning," said AT&T Chairman C. Michael Armstrong. The deal gives them access to one-third of America's households.
Under the agreement, TCI's Series A shareholders will receive 0.7757 shares in AT&T, a swap valued at about $50 a share. TCI's shares closed at 38 11/16 on Tuesday. The deal would give AT&T Consumer Services a controlling interest in AtHome, in which TCI has a large stake.
The deal would be the third biggest ever in the telecommunications industry.
The acquisition of TCI fulfills Armstrong's promise to beef up the company's weak spots and branch out into new areas of business. Faced with stiff competition in its traditional long-distance market, AT&T is hoping to get into local phone service and Internet-related businesses.
Furman Selz analyst Frederick Moran said that in an increasingly competitive telephone environment, AT&T badly wants a local telephone service platform that would allow it to complete with the regional Bell phone companies.
Getting access to as many as 33 million cable customers that are served by TCI's cable systems is a major step toward that goal, and could eventually give AT&T the ability to offer local phone service through TCI's existing cable hook-ups to customers' homes.
"We must have control of the architecture," Armstrong said on CNBC Wednesday. "We must control access to our customers and we must control costs. This investment with TCI is really the beginning of a consumer-based facilities service."
Despite a 1996 federal law intended to open up local phone markets to new competition, AT&T and other long-distance companies largely have sat on the sidelines.
A TCI deal is "exactly what AT&T has needed to burst into the local market," said Jeffrey Kagan, an independent telecommunications consultant based in the Atlanta area. "AT&T would have the ability to offer a bundle they were never able to offer before."
TCI's stock, along with those of other cable companies, surged on Tuesday after a stock analyst released a report saying AT&T would have no other likely choice for expansion than to link up with a cable TV provider.
AT&T made a move toward entering the local phone services market in January by buying Teleport Communications Group for $11.3 billion. Teleport, which is partly owned by a group of cable companies, provides local phone services to business.
A combination of AT&T with a cable company would be a return to a strategy that was abandoned in the early 1990s. The two industries have remained apart since the collapse of Bell Atlantic Corp.'s proposed $26 billion purchase of TCI in 1993.
But AT&T is gambling that TCI's upgrades of its network to handle digital services will enable it to provide mre sophisticated telecom services to households, including Internet access.
AT&T itself has a rocky history with regulators; government criticism led it to abandon merger talks last year with SBC Communications Inc., a Baby Bell.
But Federal Communications Commission chairman William Kennard Wednesday signaled this deal would have an easier time.
"If AT&T and TCI make a strong commitment to bring residential consumers more choice in local telephone and high-speed Internet access services, then this proposed merger is eminently thinkable," Kennard said in a statement.
Armstrong emphasized the new deal will create competition in local markets instead of reducing it. He expects regulators to approve its TCI purchase within 9 months. "We don't anticipate this will be a rough road," Armstrong said in a teleconference with analysts this morning.