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AT&T Stocks Plunge Amid TCI Rumors

July 2, 1998

NEW YORK (AP) _ A week-long plunge in AT&T Corp.’s stock price is starting to prompt speculation the company may need to up the ante to pull off its $31.7 billion plan to buy cable-TV titan Tele-Communications Inc.

AT&T’s stock has fallen 16 percent since the deal was announced June 24, meaning holders of TCI’s most widely traded shares will get just a third of the premium originally proposed. Another 10 percent drop from Thursday’s close would totally wipe out the premium, leaving TCI’s stockholders where they were before the deal was announced.

``It starts to get to that point, Does it make any sense?″ said Jonathan Kolle of Wilmington Trust Corp., who manages large holdings of AT&T shares for individuals and investment funds.

AT&T insists it won’t revisit the deal and expects to complete it as planned, by early next year.

But despite repeated attempts by AT&T executives to soothe anxious investors, AT&T shares on Thursday capped the seven-day plunge by dropping 3.3 percent, down $1.87 1/2 at $54.87 1/2 on the New York Stock Exchange.

Fred Moran, a financial analyst with ING Baring Furman Selz LLG, said he hoped the AT&T stock drop was short-lived but added a further drop could force TCI chairman John Malone, its largest shareholder, and fellow managers ``to consider whether or not to go through with the transaction under the current terms.

``It’s safe to conclude this severe price action could hinder the potential of the deal,″ Moran said.

For holders of TCI’s more thinly traded class B shares, including Malone, the premium has been sliced in half already.

AT&T said through a spokeswoman that it was ``absolutely committed″ to the transaction. ``It is a definitive merger agreement and both sides think this deal holds enormous potential,″ said Ruthlynn Newell, the spokeswoman.

Several calls to TCI were not returned.

AT&T’s shares went into a tailspin after AT&T said it would buy TCI as a way to launch advanced Internet, phone and entertainment services into millions of U.S. homes.

A big worry is that AT&T won’t recoup anytime soon the many billions of dollars it must spend to modernize TCI’s cable lines and equip homes for carrying the needed two-way transmissions.

The deal does not include any provisions that would automatically boost how much AT&T pays per share if its stock price drops too much. And TCI has an incentive to stick with the deal: Any side that walks away from the table must pay the other a breakup fee of $1.75 billion.

To be sure, stock prices of acquirers typically drop immediately after big deals are announced as investors sort out how long it takes to recoup investments.

And since mergers are as much a marriage of egos as companies, several industry experts say that Malone’s long positive relationship with his counterpart at AT&T _ chief executive C. Michael Armstrong _ bodes well for the transaction’s completion.

``I believe there will be no sweetening of the deal,″ said Ragu Gurumurthy, a principal at the Booz, Allen & Hamilton consulting firm, based in New York.

``With the relationship Malone and Armstrong have.... they are not going to squabble over dollars and cents.″

Malone ``is not walking because of price,″ added Salvatore Muoio, of S. Muoio & Co., a New York investment firm with holdings in TCI’s Liberty programming arm. ``If there’s anyone out there who understands the medium- and long-term upside, it has to be him.″

Still, many analysts are taking a wait-and-see attitude toward how well AT&T can merge its technologies with TCI’s.

For example, AT&T’s hoped-for phone service relies on a technology that is still in its infancy and has not yet been widely deployed via cable lines. In addition, AT&T has a spotty track record with big high-tech ventures. Last year, AT&T spun off NCR to exit a disastrous foray into the computer industry that cost it billions of dollars.

``Clearly, it’s a risky strategy from the point of implementation, and right now I think basically a lot of shareholders are saying they are really not quite sure whether AT&T will be able to execute this strategy,″ Kolle said.

Then there’s TCI’s previous failed attempt to merge with a huge telephone company.

Bell Atlantic Corp. and TCI called off their $12 billion merger four years ago after Bell Atlantic’s stock price tumbled and federal regulators capped cable-TV rates, making it tougher for the companies to pay for the needed investments.

But Moran said this deal stands a better chance ``because you don’t have any immediate threat of regulation.″

He added that AT&T still needs to find a way to enter the local-phone market, after scrapping a series of early efforts that proved too expensive or faced steep regulatory obstacles.

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