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AT&T Will Buy Cable Power TCI in All-Stock Deal

Telecom: Transaction--expected to be worth more than $48 billion--will create a $60-billion communications giant offering consumers unprecedented product choices.

June 24, 1998|SALLIE HOFMEISTER and ELIZABETH DOUGLASS | TIMES STAFF WRITERS

In a deal that sharply escalates the race to provide communications services to the nation's households and businesses, phone giant AT&T Corp. will announce today that it will buy cable powerhouse Tele-Communications Inc., sources close to the company said.

The all-stock transaction is valued at $48 billion.

The deal--the second-largest telecommunications merger in history--will create a $60-billion giant that would offer consumers an unpecedented supermarket of products--including cable television, long-distance and cellular telephone and high-speed Internet service.

AT&T, the nation's largest long-distance carrier with 80 million customers, has been looking for an entry into the local phone market, an area dominated by such companies as Pacific Bell, Ameritech and GTE. AT&T would provide local phone service using upgraded cable wires. The deal represents a bold step by new AT&T Chief Executive C. Michael Armstrong to transform the once-stodgy phone giant into the No. 1 provider of modern communications and entertainment services.

"This is great news for AT&T," said Jeffrey Kagan, president of Kagan Telecom Associates, an Atlanta-based consulting firm. "It allows them to instantly jump over all the hurdles that they've had getting into local phone service."

Sources say under the deal, cable visionary John Malone, the chairman and controlling shareholder of TCI, will retain control of Liberty Media Corp., the programming arm of TCI that owns interests in more than 90 cable channels. Malone was an early proponent of a 500-channel universe and led the industry's high-tech transformation.

While several companies offer cable television, telephone and high-speed connections to the Internet in select markets, none has the reach of TCI. The Englewood, Colo.-based company serves 11 million cable subscribers and has partnerships with other cable operators that give it access to nearly half of the nation's 72 million cable households.

Under the deal, AT&T will take control of TCI Venture's controlling stake in Internet service provider @Home, sources say.

The deal must be approved by shareholders of both companies and by regulatory agencies.

Given the dominance of both companies, Kagan cautioned that the deal will be heavily scrutinized by regulators. Congress is growing increasingly uneasy about consolidation in the telecommunications and cable industries--two groups they had hoped would compete against each other, Kagan said.

Speculation about a deal started leaking out on Wall Street late Tuesday, causing a broad rally in cable stocks. TCI's shares, which have tripled over the last year, jumped 8.4% Tuesday, closing up $3, to $38.69 on Nasdaq, on heavy volume of 7.1 million shares. AT&T shares surged $2.31, to $65.38, on the New York Stock Exchange.

AT&T is purchasing TCI shares at a value of $51, valuing the cable company at $31 billion. Under the deal, AT&T will assume $10 billion of TCI debt.

Though specific terms of the deal were not available, sources indicated Malone had negotiated a lucrative, but complicated deal. At current market values, TCI's stock is worth about $20 billion. Malone would receive a hefty premium for his control of nearly 60% of TCI's voting stock.

Malone has been interested in finding a buyer for TCI since a proposed $33-billion acquisition by Bell Atlantic Corp. fell apart in 1994. The combination was heralded as a symbol of the convergence of telecommunications and television, as Washington regulators contemplated relaxing barriers that prevented the two industries from competing.

But that deal collapsed as Washington moved to cap cable rates. At the same time, Wall Street drove down Bell Atlantic's stock in disapproval of the high price the phone company was paying for debt-laden cable assets.

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