AT&T; to Buy Teleport in $11.3-Billion Deal

NEW YORK — AT&T; Corp. on Thursday agreed to buy Teleport Communications Group in an $11.3-billion stock deal that gives the long-distance giant a quick entry into the territory of regional Bell companies.

Teleport sells local phone service and data communications primarily to businesses in 66 major cities, including New York and Los Angeles.

AT&T; Chairman C. Michael Armstrong said the deal would cut AT&T;’s costs by $1 billion in the first year of the deal and more than $2 billion annually by 2002. It also would enable AT&T; to sell all-in-one packages of local, long-distance and data communications services to businesses, the most lucrative part of the telecommunications industry.

Armstrong said he expected the deal to clear the necessary regulatory hurdles. “I would hope that business customers would be able to buy right after we close,” he said in a teleconference late Thursday.

Lat year, AT&T; stopped marketing local phone service to residential customers, saying that it was paying local Bell companies too much to lease lines from them. Although it’s currently focusing on selling local service to business customers, AT&T; says it still plans to expand into the consumer side of local service.

Teleport, with more than $500 million in revenue last year, has built its own network of fiber-optic cable to compete against the far larger regional Bell companies.

The AT&T; deal is its first major acquisition under Armstrong, who was hired in October following a protracted search. Last year, the company sold or announced the sale of $3.5 billion in assets unrelated to its core businesses as it builds a stockpile of cash to intensify its focus on telecommunications through acquisitions and other means.

Robert Annunziata, chairman and chief executive of Teleport, will become executive vice president of AT&T; and head a new local services unit.

Several cable TV companies that are major shareholders of Teleport--Cox Communications, Comcast Corp. and Tele-Communications Inc.--also approved the deal.

AT&T; agreed to swap slightly less than one of its common shares for each Teleport share, valuing Teleport at about $59 a share--a nearly 10% premium above Teleport’s Thursday closing price. Teleport shares fell $3.63 to close at $54.13 on Nasdaq; AT&T; rose $2.63 to close at $62.63 on the NYSE.

But some analysts criticized the deal, saying that AT&T;’s purchase could stifle Teleport’s fast growth. With AT&T;’s purchase, Teleport could lose the business of Sprint, MCI and other AT&T; rivals and see its growth slow, said David Goodtree, an industry analyst with Forrester Research.

“It doesn’t make any sense to me why they’re buying them,” Goodtree said. Goodtree questioned the need for AT&T; to buy Teleport, noting that AT&T; was already leasing lines from the company.

Still, AT&T;’s is the latest in a string of similar deals. Its acquisition comes after WorldCom Inc., the fourth-largest long-distance phone company, bought MFS Communications and Brooks Fiber Properties, two other non-Bell providers of local service. WorldCom last fall also agreed to buy MCI Communications Corp., the second-largest long-distance phone company, in a deal then valued at a staggering $37 billion.

The smaller sellers of local phone service, which sell primarily to businesses, are also combining with other small telecommunications companies. Unlike the five regional Bell companies that now survive AT&T;’s breakup in 1982, these competitive local exchange carriers are free to sell both local and long-distance phone service, enabling them to offer all-in-one packages.

In addition, most of the carriers have built their own networks of fiber-optic cable, overcoming the need to lease lines from the regional Bell companies, which cuts into profit.

Demand has soared for their services. In 1997, the competitive local exchange business grew more than 50% to $3.1 billion, according to the Yankee Group, a Boston-based research firm.

The companies became even more attractive last week, after a federal judge in Texas ruled that the regional Bell companies could start selling long-distance phone service without first opening their local markets to new competition.

Although the order is being contested by rivals and federal regulators, it has lit a fire under long-distance companies worried they won’t have all-in-one packages to sell. So far, long-distance companies have been stymied from buying Bell regional phone companies by federal regulators worried about stifling competition.

“In the end, everyone is under tremendous pressure to make the local market competitive,” said Berge Vazian, an industry analyst with the Yankee Group.

“What we’re seeing there is consolidation within that [local phone] segment and the emergence of some clear players,” he said.