After you've bet the house, why not double down?
That seems to be the strategy behind
offer to buy
for more than $62 billion, including debt. The bid, a mix of cash and stock that equals 87 3/8 per MediaOne share, solidly trumps
friendly, $54 billion offer for MediaOne, the nation's fourth-largest cable provider, with five million subscribers. If AT&T wins, the combined company would be far and away the largest U.S. cable operator, serving 17 million households nationwide and running its wires past more than one in four U.S. homes.
So far, investors are buying AT&T's strategy of using cable as a way to bypass the Baby Bells, its matricidal progeny, and launch local phone service. The company's stock is up more than 40% since June, when it entered the cable business in a big way by buying
, then the nation's largest cable operator. For now, at least, investors have visions of a gloriously profitable broadband future for AT&T and are willing to ignore the fact that the company's per-share profits have been roughly flat for six years.
The new deal will do little to help earnings, at least in the short run. Even by the standards of recent cable deals, AT&T's bid is incredibly expensive. MediaOne is difficult to value, because it has substantial noncable assets in addition to its cable properties. But a quick back-of-the-envelope calculation reveals that AT&T has offered more than $5,000 for each MediaOne subscriber. Until last year, cable companies were generally valued at about $2,000 per subscriber in takeovers, though the figure varied because some cable operators have spent far more money upgrading their systems than others.
Prices began moving up last year after AT&T bought TCI, which had relatively poor systems, for around $3,000 per TCI subscriber. Even so, the high end of recent deals had been no more than $4,000 per subscriber -- far less than AT&T is offering for MediaOne.
An AT&T spokeswoman says the company is offering just $3,700 per MediaOne subscriber. But that figure appears to be based on an aggressive estimate of the value of MediaOne's noncable assets. After all, Comcast estimated it was paying $4,000 per MediaOne subscriber, and its bid is $8 billion less than AT&T's.
The richness of AT&T's offer comes from a "gutsiness" born of desperation, independent telco analyst Jeffrey Kagan says. "AT&T has decided the wire they're going to ride into the home is cable. It doesn't matter what they have to pay to get in. Their survival depends on it."
AT&T plans to offer local telephone and long distance services over its cable lines, bypassing the Baby Bells, which have kept their stranglehold on the local phone business despite the best efforts of regulators to pry them off. For now, the Bells are still banned from offering long-distance service, but that barrier is slowly crumbling, and when it cracks completely, AT&T fears that many consumers will probably opt for long distance and Internet service from the Bells -- if only for the convenience of having one provider and one monthly bill.
At that point, AT&T must be able to offer its own version of integrated service, and the only way it can do that is through cable, Kagan says. "If AT&T is going to be successful using cable as the way to reach customers, they need as much cable as they can get their hands on."
AT&T has negotiated with big cable companies, including MediaOne and Comcast, to offer its phone and Internet service over their lines, and the company announced an agreement with principle with
earlier this year. But MediaOne, which owns a big stake in Time Warner, reportedly didn't like the deal, figuring it was too favorable to AT&T. Buying MediaOne naturally solves that problem for AT&T, clearing the way for the company to offer its phone service over TCI, Time Warner and MediaOne cable systems, which together cover close to half of all cable households.
The rich price isn't the only reason the MediaOne bid is risky for AT&T. Berge Ayvazian, executive vice president with the
consulting firm, says he's surprised at the level at which AT&T is investing in the consumer market. "They still have a large investment to make in their core network to address the needs of business customers and the growth of the Internet overall," Ayvazian says.
He also points out that by initiating this bidding war with Comcast, AT&T risks losing Comcast as an affiliate for the Internet and telephony services it hopes to market nationwide. "There must have been something
in affiliation negotiations with Comcast that brought them to an impasse," Ayvazian speculates, sparking the bid to acquire MediaOne "as opposed to affiliation, which would have been far cheaper." AT&T declined to comment on the issue.
But after already throwing more than $46 billion into cable, a business that's never had a dollar in bottom-line profits, AT&T apparently figured another $60 billion or so was chump change.
Staff reporter George Mannes contributed to this report.