SBC Buys 43% Stake in Prodigy

The deal will join the companies' consumer and small business Internet operations and sends Prodigy into a host of new markets.
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Updated from 11:23 a.m. EST

SBC Communications

(SBC)

announced on Monday that it was acquiring a 43% stake in

Prodigy Communications

(PRGY)

in a deal that joins their consumer and small business Internet operations and sends Prodigy into a host of new markets.

The agreement means Prodigy will manage SBC's 650,000 dial-up, ISDN and basic digital subscriber line Internet customers, raising the Internet service provider's subscriber list to more than 2 million. By exclusively marketing Prodigy's service, SBC, the nation's biggest local telephone company, intends to add 1.2 million more Internet customers to Prodigy over the next three years.

SBC, based in San Antonio, has already committed $6 billion toward bringing high-speed DSL to a majority of its customers by 2002.

"This is peanuts, a non-event for SBC, but it's a very big plus for Prodigy," said Tom Burnett, president of the independent research group

Merger Insight

. "For Prodigy, it could open up a whole new market."

Analysts also saw the deal as SBC confirming its interest in high-speed Internet access. Mel Marten, a telecom analyst with

Edward Jones

, said telecommunication companies known as the Baby Bells have regretted not jumping into the Internet when it first took off several years ago because they did little despite being well positioned for success.

"AOL has dominated the market when that could have been the Baby Bells' territory," said Marten, who rates SBC a strong buy. His firm doesn't cover Prodigy and hasn't done underwriting for either companies. "The high-speed access is kind of the next round, and SBC has said it's going to be a big player."

Both companies' boards signed off on the deal. It still must receive regulatory approval, which is expected to take three to six months.

Under the terms of the deal, Prodigy will contribute its operations to a partnership it is forming with SBC. The partnership, which will use the Prodigy brand name, will also hold some SBC Internet assets. The partnership will be 57% owned by Prodigy and 43% owned by SBC, which can convert its stake into a direct interest in Prodigy.

Other parts of the pact include the White Plains, N.Y.-based Prodigy using SBC as its preferred telecommunications services provider and SBC taking three seats on Prodigy's nine-member board.

"In effect, we're creating a broadband-focused ISP that is going to dramatically change what it means to be online -- giving us the ability to attract and retain customers in the 'new' high-speed Internet market," James D. Gallemore, executive vice president for SBC's strategic marketing and planning, said in a statement.

(Prodigy closed down 1 1/16 to 31 while SBC finished down 1/16 to 51 7/16.)