AT&T to gain local market with merger Top long-distance provider, Teleport OK $11.3 billion deal

Regulatory approval needed

Service expected to be offered mostly to business customers


January 09, 1998|By Mark Ribbing | Mark Ribbing,SUN STAFF

AT&T, the nation's top long-distance telephone company, made its boldest move yet to enter the $100 billion local-service market, announcing yesterday that it has agreed to merge with Teleport Communications Group Inc., a local-service provider.

The all-stock merger, valued at $11.3 billion, was approved yesterday by the boards of both companies. The deal still must receive regulatory approval and is expected to be completed by late 1998.

Like other major phone companies, New York-based AT&T seeks to offer both local and long-distance service to customers. It is believed that such "bundling" would give a company an edge among customers who prefer to deal with only one phone company and only one bill.

AT&T has tried for years to break into the local-service business, but has had limited success. The company has 14 local markets in six states. Until now, it has been forced to purchase local-service access from its fierce rivals, the Bell companies.

By teaming up with TCG, which has established its own fiber-optic, local-service network in 66 major markets nationwide, gains a measure of independence.

"This is a very fundamental, facilities-based investment," said C. Michael Armstrong, AT&T's chairman and chief executive officer, who took over in November.

TCG, which is based in Staten Island, N.Y., has about 30 employees at its office in Baltimore. The company has 400 miles of high-capacity network in the city.

Residential customers are unlikely to see the impact of the deal anytime soon. TCG is one of a hungry new breed of telecommunications companies called competitive local exchange carriers, or CLECs.

These companies have largely steered clear of the residential market in favor of offering their independent, high-capacity networks to the more profitable business sector.

Three large cable-television firms -- Cox Communications Inc., Tele-Communications Inc. and Comcast Corp -- own 66 percent of TCG.

Chris Landes, an analyst for the Verona, N.J. telecommunications consulting firm TeleChoice Inc., who formerly worked in strategy and marketing for AT&T, said the deal was no surprise.

"AT&T has been looking at Teleport actively since the middle of last year," he said.

According to Landes, the acquisition of TCG is part of an AT&T plan to establish a local network independent of the Bells' lines.

"It appears Armstrong is pretty serious about using competitive local exchange services to carry out his local strategy," he said. "Teleport's not the end of that strategy. It's the beginning." He said AT&T's next target may be WinStar Communications Inc., another CLEC.

It is widely speculated that AT&T's wooing of TCG was given greater urgency by the aggressive behavior of WorldCom Inc., a Jackson, Miss.-based firm that has risen from obscurity to become the fourth-largest long-distance company and a genuine rival to AT&T.

In November, WorldCom agreed to merge with MCI Communications Corp., the number-two long-distance carrier. In

addition, WorldCom had already absorbed competitive local-service companies such as Brooks Fiber Properties, Inc.

If AT&T wanted to grab an independent competitive local company for itself, it would have to move fast while there were still some left. At the time of WorldCom's triumphant acquisitions, however, AT&T was in an unusual state of disarray.

The company's management was in flux, and only recently has Armstrong begun to make his mark, slashing excess costs and seeking to spin off pieces of the company that are not related to the core telecommunications business.

The merger comes about a week after a federal court in Texas issued a ruling that could allow the Bells to enter long-distance. Officials of the merging companies denied that this ruling had any effect on the decision to consolidate.

AT&T officials said the merger will save over $1 billion in access costs and other expenses in 1999, the projected first full year of the merger, and that savings will exceed $2 billion by 2002.

Landes said TCG also gets something out of the merger. "Teleport will gain a lot of equity. It will receive local access resources that AT&T's been paying to other companies."

The companies had no comment on whether AT&T had to outbid any other suitors for TCG.

The deal did not conclude in time for the close of the American stock markets. However, Wall Street was already reacting strongly to news of the merger talks. AT&T closed at $62.63, up $2.63. By contrast, TCG closed down $3.63 at $54.13. Landes said the downturn in TCG stock was strange. "This is only a $500 million company," he said of TCG. "To offer $11 billion for it is pretty sizeable."

Pub Date: 1/09/98

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