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AT&T snags Teleport
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January 8, 1998: 8:20 p.m. ET
AT&T says $11.3 billion deal will provide foundation for local services
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NEW YORK (CNNfn) - Following through on earlier speculation, AT&T Corp. Thursday announced a definitive merger agreement to purchase Teleport Communications Group in a stock deal worth $11.3 billion.
ATT officials said the acquisition of the Staten Island, N.Y.-based local phone service provider speeds AT&T's entry into the local telephone business, providing ATT with some added firepower to fend off new rivals.
Under the terms of the agreement, announced late Thursday, Teleport shareholders will receive 0.943 AT&T shares for each Teleport share. At current prices, the transaction values Teleport at $59 a share.
Both companies boards of directors have already approved the deal, which is expected to close by late 1998.
Word of the pending deal pushed AT&T's (T) stock up 2-5/8 to 62-5/8 Thursday while Teleport (TCGI) was off 3-5/8 to 54-1/8.
Teleport is one of a new breed of phone company which stays away from residential local service and instead hunts for the more lucrative business customer market.
Despite having what looks like an effective strategy, the company is so far unprofitable because it is still building its network, an expensive and cumbersome process.
However, Teleport is already in several key markets, including New York City and Los Angeles. AT&T hopes to use its foothold in those markets to grab larger chunks of business away from the Baby Bells.
"TCG has more fiber route miles and serves more businesses in more cities than any other competitive local access company," AT&T Chairman C. Michael Armstron said. "Together, we will be able to bring AT&T Digital Link Service to thousands of American business.
Appearing Thursday on "Moneyline With Lou Dobbs," Armstrong said the deal was a significant shift in strategy that could generate as much as $21 billion in new revenue.
"We had been pursuing [the local market] in the past using local exchange carriers. This investment is a facilities-based strategy to reach the business customer, give them choice and competition and give us a growth opportunity," he said.
AT&T also said the combination would generate savings of between $1.2 billion and $1.5 billion in the first year following completion. By the year 2002, that figure would climb to more than $2 billion.
Much of the savings is expected to come from lower access charges for switched and dedicated services as well as cutting administrative and other costs.
Cable companies Cox Communications, Comcast Corp. and Tele-Communications Inc., which together hold about 95 percent of the voting power and 66 percent of the equity ownership in TCG, have approved the merger. They have also signed long-term agreements to provide construction and maintenance services to TCG.
Armstrong conceded the merger will probably mean some job cuts, but he said the number of layoffs would be small.
Armstrong said he believes AT&T paid a fair price for Teleport and that both companies will be able to grow much faster together than they could have separately.
Although the courts are wrestling with provisions of the Telecommunications Act of 1996 that govern how the regional Bells and long distance companies should compete in each other's markets, Armstrong said AT&T is still intent on providing local service. (283K WAV) or (283K AIFF)
Armstrong said AT&T plans to examine several different alternative delivery methods including cable, mobile, fixed and broadband wireless and even telephony over electric wires.
AT&T expects the merger to start contributing to earnings in the first full year after closure thanks to savings in access payments, elimination of duplicate sales and administrative expenses, reduced capital and network operating expenses and higher revenues through local services to businesses.
Robert Annunziata, TCG's chairman and chief executive officer, will become executive vice president of AT&T and will lead a local services unit incorporating local service and access management operations. Annunziata will report to Armstrong and AT&T President John Zeglis.
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