TCI Deal Could Save AT&T $12B

Bears who growled at AT&T's plan to acquire Tele-Communications Inc. may have missed something: owning a cable into U.S. homes and offices will help reduce the $12 billion AT&T pays each year to the Baby Bells in local access charges.

That's no small matter as AT&T jumps into the $100 billion local phone market, but it was largely glossed over as investors drove down AT&T shares after the merger was announced.

AT&T's market cap fell by about $14 billion in just three days starting June 24. Shareholders were leery of TCI's $16 billion in debt and concerned about capital expenditures required to upgrade a cable system to handle phone service. The stock skidded to 56 3/4 from 65 3/8. It's now about 59.

According to AT&T spokesman Oriano Pagnucci, local telephone companies that were once part of the Bell System receive about $25 billion per year for connecting local customers to their long distance carriers. With 55 percent of the long distance market, AT&T's share would be just over $12 billion - nearly a quarter of the company's 1997 revenue of $51.3 billion.

AT&T said it will need to spend about $5 billion over the next four years and that TCI telephony won't be available until 2001. But this is balanced against the company's current $12 billion annual local access bill and the now-real prospect of competing for more local business.

Shareholders who rushed to dump their AT&T stock may have been spooked for all the wrong reasons, according to Salomon Smith Barney analyst Stevyn E. Schutzman.

"Everybody's freaked out, but the fact is that AT&T's done a deal like this before," said Schutzman. "They bought McCaw cellular for $14.5 billion and poured a boatload of CapEx (capital expenditures) into it. And it wasn't a matter of profitability in those days, it was a matter of market share. And look where it got them. Today, they're the market leader."

Indeed, shareholders shouldn't have been surprised by AT&T's aggressiveness in snapping up TCI as a solution to bypassing local exchange carriers - LECs. In speech after speech, AT&T President John D. Zeglis has continually slammed LECs for their unwillingness to cooperate in offering competitive local service, and he reiterated his company's intense desire to find ways around the intransigence.

In a presentation to the American Enterprise Institute on Dec. 18, Zeglis said that local service was "a $100 billion market virtually untouched by serious competition. Strategically, it's a crucial part of the integrated service packages we're counting on to create customer value in the future. We want to be the industry leader in providing service over any distance, in any form. Local service is absolutely critical to delivering on that strategy."

Written by Lewis Perdue