AT&T snags TCG to battle MCI/WorldCom

Fourteen years after being forced from the local telephone business, AT&T boldly forced its way back into the fray saying it will acquire Teleport Communications Group, Inc. (TCG), an industry leading competitive access provider with facilities in 66 U.S. markets.

AT&T has finally pulled the trigger to become a local phone company.

The long-distance giant yesterday said it will buy TCG, the competitive access provider that competes with regional Bell operating companies and GTE Corp. in 66 U.S. markets.

The move will enable AT&T to create end-to-end WANs without the installation delays and chronic finger-pointing of separate local access lines that have bedeviled users ever since AT&T's original 1984 divestiture.

Users will have to wait a while for the benefits, since the $11.3 billion deal is not expected to close until late this year. But AT&T and TCG officials said while the sale is pending, they would try to accelerate the migration of AT&T users' local access lines from RBOCs to TCG.

"The underlying theme of this transaction is that AT&T is investing for growth," said AT&T Chairman and CEO C. Michael Armstrong. "We have every intention of being a fully integrated global telecommunications provider."

Armstrong emphasized that the move would allow Teleport to reach business customers via a direct, facilities-based connection. That stood in stark contrast to former AT&T CEO Robert Allen's emphasis on reselling RBOC and GTE local exchange lines, a strategy that essentially ended in November when AT&T ceased marketing resold lines.

While Armstrong's strategy is much more expensive, it could have been even more costly for the long-distance giant. AT&T negotiators apparently won Teleport's agreement not to demand more than TCG's value in the stock market, which soared in 1997 to nearly $60 a share.

And taking a page from WorldCom, Inc. CEO Bernard Ebbers' playbook, AT&T offered its own stock in payment. It was able to do so because of a sharp rise in AT&T's stock since Armstrong assumed control in November. Wall Street appeared to applaud the deal. In an unusual move, the purchasing company's stock went up. On Thursday, AT&T's stock rose more than $2.50 a share.

Depends where you are

For all of TCG's success, analysts noted that the company currently serves only about 15,000 buildings around the country.

To create greater market coverage in the future, AT&T got an agreement from TCG's current owners - mostly cable TV companies - to provide construction and maintenance for AT&T and TCG over their cable lines. TCG's CEO Bob Annunziata, now slated to be an executive vice president with AT&T for local service, also said TCG will continue added 10 to 12 local networks a year to its stable.

The AT&T/TCG merger lines up favorably with the the pending MCI/WorldCom merger. Both now will have comparable alternative local fiber facilities in major cities, plus a vast long-distance network.

But some users saw an even greater potential benefit in the AT&T deal. The MCI/WorldCom combo reduces by one the number of carriers that users can play off against each other to negotiate the best rates, noted Ronald West, immediate past president of the Communications Managers Association. But the AT&T deal leaves in place the carrier and route diversity between TCG and an RBOC that many users seek in large cities without eliminating a long-haul carrier from the scene.

TCG users such as West, who is manager of telecommunications for the New York law firm of Shearman & Sterling, said they may find dramatically quicker provisioning for both local and long-distance service under the merger. That is because once a TCG connection to a building is in place, TCG provisions new channels in software within two hours, rather than the traditional week to a month of RBOCs, West said.

"The installation intervals can come down drastically," West said. Large AT&T frame relay users such as the WorldSpan airline network say that the biggest holdup in installation intervals still tends to be RBOC circuits.

The AT&T/TCG deal overshadowed another telecom industry merger announcement earlier in the week. Super-RBOC SBC Communications, Inc. put up a $4.4 billion bid for Southern New England Telecommunications Corp. (SNET), the dominant phone company in Connecticut that charged into the long-distance market two years ago.

The SBC/SNET marriage could give SBC the same long-distance market it has been coveting in numerous court proceedings but denied so far by the Federal Communications Commission. While SBC is still barred from offering long distance within its own territory, SNET is not, and has signed up 40% of its local customers for long-distance service.

SNET's location, not far from New York City, would give SBC access to a potentially huge number of customers that need trans-Atlantic phone service, according to Simon Reeves, a communications analyst with Decision Resources, Inc. in Boston. Through its $16.7 billion purchase of Pacific Telesis Group in 1996, SBC already has the California phone market as a base for trans-Pacific traffic.

Also, with an SNET beachhead in Connecticut, SBC could tap into the lucrative New York City local market just over the state line, using SNET switches to handle the calls. Ironically, that would put SBC in direct and likely fierce competition with Bell Atlantic Corp., AT&T/TCG and MCI/WorldCom.