AT&T nears broad partnership with Microsoft

Deals give phone giant edge in battle with Comcast for MediaOne



AT&T Corp. is close to forming a wide-ranging partnership with Microsoft Corp. as part of an intricate web of deals that has put AT&T on the verge of winning the battle against Comcast Corp. for MediaOne Group Inc., the big cable television company, executives close to the negotiations said last night.

Comcast, whose initial $53 billion bid for MediaOne was topped by an AT&T offer of $58 billion, has agreed to accept a two-part consolation settlement in which it will end up with as many as 2 million of AT&T's existing cable subscribers, mostly on the East Coast, for up to $9 billion, the executives said.

Comcast also will assume management control over 2 million more AT&T cable subscribers.

The companies could announce the deals as soon as today, the executives said.

Even after selling up to 2 million subscribers to Comcast, AT&T, the nation's biggest telephone company, would emerge from the fray as the nation's biggest cable television company.

Before agreeing to acquire Tele-Communications Inc. for about $32 billion during the summer, AT&T had no presence in cable television. But C. Michael Armstrong, AT&T's chairman of 18 months, is pursuing a vision of delivering integrated packages of telephone, television and high-speed Internet access to millions of households using cable lines.

Comcast, its ambitions for MediaOne apparently dashed, will still end up the No. 3 cable television company. The residential customers it is set to buy from AT&T will serve to solidify Comcast's dominance between Philadelphia and Washington, executives close to the talks said. They said AT&T and Comcast would form a venture to offer telephone service over Comcast's cables.

But the most intriguing and potentially important element of the numerous deals is the partnership that AT&T is negotiating with Microsoft, the No. 1 maker of personal computer software. Together, AT&T and Microsoft have a market value of more than half a trillion dollars and, if linked, would form the world's leading force in technology and communications.

Any AT&T-Microsoft partnership would be sure to rouse concern among politicians and regulators. Though the two companies are not competitors, AT&T and Microsoft are behemoths with long traditions of dominating their industries. The prospect of an alliance is sure to seem mind-boggling to at least some powerful people in Washington.

William E. Kennard, chairman of the Federal Communications Commission, declined to comment last night.

In the deal being negotiated last night, Microsoft would invest about $5 billion in AT&T to acquire 2 percent to 3 percent of the communications giant, executives close to the talks said, and Microsoft would pay more than the closing price of AT&T shares yesterday on the New York Stock Exchange. The size of the premium to be paid was said to be a central sticking point in the talks.

While AT&T does not need the money, an investment from Microsoft would buoy AT&T's shares, which may fall as it continues its headlong deal-making.

As for Microsoft, it would get what it has long been seeking: a commitment from AT&T to use Microsoft's Windows operating system in the advanced set-top boxes that AT&T will deploy to offer bundles of digital services.

Though Comcast has agreed to drop out of the bidding for MediaOne, it will walk away with a rich prize, analysts said. At a price of up to $9 billion in cash and stock for as many as 2 million cable subscribers, Comcast is paying roughly $4,500 a subscriber, about the industry average.

Comcast, based in Philadelphia, will swap another 700,000 subscribers to give it more clustered subscribers in crucial markets, including Philadelphia; Nashville, Tenn.; and parts of Michigan; and giving up some in Chicago; Fort Lauderdale, Fla.; and Sacramento, Calif.

To pay for the subscribers, Comcast will use the $1.5 billion fee that MediaOne will pay for backing out of the original deal with Comcast.

Comcast also is swapping back to AT&T $1.5 billion in AT&T stock and another $1 billion in the stock of At Home Corp., a provider of Internet services over cable modems. Had Comcast sold that stock on the open market, it would have paid heavy capital gains taxes. Selling it back to AT&T is a tax-free transaction, people close to the company noted.

To pay the balance of the purchase price, Comcast will issue additional shares of its own nonvoting stock at a price based on how the stock trades over the next 50 days. A person close to the talks said that Comcast expected to add 75 million new shares to its existing base of 450 million shares.

Pub Date: 5/05/99

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