@Home Surges on AT&T Offer to Buy MediaOne

SAN FRANCISCO -- The Internet world's longest-running courtship just got one step closer to the big M.

Speculation that

@Home

(ATHM) - Get Report

may get hitched with

Time Warner's

(TWX)

RoadRunner

service resurfaced late Thursday after

AT&T's

(T) - Get Report

competing bid to acquire the

MediaOne Group

(UMG)

. All the talk drove @Home's stock up 9% Friday to 158 1/2.

"It significantly enhances the likelihood that @Home and RoadRunner will merge," says David Levy, an analyst with

ING Baring Furman Selz

. "AT&T will be more aggressive in putting the two together."

To understand why the AT&T bid has rekindled the merger talks, it's necessary to get a handle on the incestuous nature of the cable industry. Through its acquisition of cable giant

TCI

, AT&T gained a controlling interest in cable-modem ISP @Home.

That's because @Home has an unusual structure in which the broadband company is partly owned by 21 cable operators that have signed exclusive agreements with @Home to provide high-speed Internet service over their cable lines. TCI was the single largest owner of @Home with a 40% stake. After AT&T closed its acquisition of TCI last month, they took control of that stake as well as 70% of the voting rights of the company and three of 11 board seats.

For its part, MediaOne owns about 34% of RoadRunner, and has a "50% managerial role," says RoadRunner spokeswoman Sandy Colony. The rest of RoadRunner is owned by a group of powerful media and technology companies, including Time Warner,

Microsoft

(MSFT) - Get Report

,

Compaq

(CPQ)

and

Advance/Newhouse

.

Further easing the merger possibilities is the fact that MediaOne owns 26% of

Time Warner Entertainment

, the Time Warner business unit that manages RoadRunner. So, the theory goes, if AT&T were to buy MediaOne, it would be one giant step closer to combining the two leading high-speed Net access companies to create a broadband behemoth.

"AT&T wants to make a complete Internet service," says Levy. "With @Home, RoadRunner, AT&T's WorldNet and Excite, they'll have all their bases covered."

Investors and analysts have been speculating for months that the two high-speed ISPs would merge. @Home president and CEO Tom Jermolak has

said he would like to see the two join hands. But some AT&T executives have pooh-poohed the idea. Following

Comcast's

(CMCSA) - Get Report

bid to acquire MediaOne in late March, which also rekindled merger talks, AT&T's broadband and Internet services division president Leo Hindery said the phone giant is too busy with the recently acquired cable giant TCI to consider the broadband marriage. Comcast's bid reignited merger speculation because Comcast is one of the top three equity partners of @Home, owning about 12% of the company.

If the two companies merged, the combined service would have 710,000 subscribers in a coverage area that reaches 91 million homes.