Wednesday, June 24, 1998
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An Investment Opinion
by Dale Wettlaufer

AT&T To Merge with TCI

Stirring up the cable television pot some more -- a year after Microsoft (Nasdaq: MSFT) announced a $1 billion investment in cable TV operator and programmer Comcast Corp. (Nasdaq: CMCSA and CMCSK) -- AT&T (NYSE: T) announced this morning an agreement to acquire Tele-Communications Inc. (Nasdaq: TCOMA) for $48 billion in AT&T stock. AT&T will create a new division, Consumer Services, which will "combine [AT&T's] current consumer long distance, wireless, and Internet services units with TCI's cable, telecommunications, and high-speed internet businesses." This will trade on the NYSE as a "letter stock" or "tracking stock," and AT&T will also issue tracking stock for TCI's programming and distribution arm, Liberty Media (Nasdaq: LBTYA).

The move to accelerate the combination of voice and data service with cable harkens back to October 1993 when Bell Atlantic (NYSE: BEL) tried to hook up with TCI. As TCI's inimitable CEO John Malone said in a Wired interview, it wasn't the threat of regulatory review that scuttled the merger, but Bell Atlantic's stock price decline that really did things in. Bell Atlantic CEO Ray Smith explained that his board was totally in agreement with the merger, but that the yield-oriented investors in his shareholder base couldn't stay on board with the idea and thus took down the value of Bell Atlantic. This morning's $5 1/2 retreat to $59 7/8 in the shares of AT&T may reflect some of that same conflict, as this changes the dynamics of AT&T quite a bit.

Having gotten rid of some supposedly synergistic units in Lucent (NYSE: LU) and NCR (NYSE: NCR) over the last year, investors might be worried that AT&T won't be able to capitalize on the obvious efficiencies here. I mean, who couldn't visualize the benefits of combining AT&T telecom assets with TCI's line into homes. Not only that, but Liberty Media owns chunks of some seriously powerful programming assets such as BET, USA Networks, QVC, Time Warner (NYSE: TWX), Discovery Channel, and Fox. The value of the deal to AT&T's shareholders will be told in time, but the market thinks initially that TCI got the better end of the deal with TCI's shares advancing $1 7/8 to $40 9/16 and AT&T's shares dropping. Fortunately, there will be tons of media coverage and expert analysis of this deal over the next couple of weeks. There will be more than enough analysis to help investors get a better handle on the macro and micro effects of this watershed deal.

Other cable TV companies also moved higher this morning. Cablevision Systems (AMEX: CVC), of which TCI owns somewhere in the neighborhood of 16%, gained $11 1/2 to $73 1/2. Comcast Corp. (Nasdaq: CMCSA) gained $1 3/16 to $40 15/16, Time Warner (NYSE: TWX) rose $3 to $86 1/4, and set-top box manufacturer General Instrument Corp. (NYSE: GIC) gained $2 1/2 to $25 11/16.


Wireless communications, semiconductors, and advanced electronic systems, components, and services company Motorola (NYSE: MOT) rang up $1 to $53 after announcing that its Cellular Infrastructure Group has sold 50,000 units of fixed wireless terminals to Tata Lucent Technologies Ltd. of India, a joint venture between Tata Teleservices and Lucent Technologies.

In an effort to "maximize shareholder value," healthcare management company MedPartners (NYSE: MDM) announced plans to sell its Team Health operations, which organizes and manages physicians and other healthcare professionals to hospitals throughout the U.S. MedPartners, which gained $3/4 to $8, has hired Salomon Smith Barney to advise on such a sale.

Carpeting and rugs manufacturer Shaw Industries (NYSE: SHX) rose $1 9/16 to $18 1/16 after agreeing to sell its residential retail operations, consisting of about 275 stores in 26 states, to floorcovering retailer The Maxim Group (NYSE: MXG) for about $115 million in cash, stock, and assumption of debt. CS First Boston raised its rating on Shaw Industries to "buy" from "hold." Maxim gained $2 to $18 5/8.

Several companies advanced on news that they will be added to the Standard & Poor's 500 Index after the close of trading on June 30. Brokerage firm Bear Stearns (NYSE: BSC) was lifted $3 to $57 1/4; financial services company Capital One Financial (NYSE: COF) moved up $4 3/8 to $114 15/16, and post-secondary education financial services company SLM Holding (NYSE: SLM) climbed $1 11/16 to $45 3/4.

Amgen (Nasdaq: AMGN) climbed $2 3/16 to $64 7/8 after Gruntal & Co. upgraded the company to "strong buy" from "buy" due to the government raising its reimbursements for the drug company's blood cell production regulation drug Epogen. Gruntal raised its target price on Amgen to $82 from $69 and said the shares were "seriously undervalued."

Rambus Inc. (Nasdaq: RMBS), which makes an interface that accelerates the exchange of signals between a computer's memory and logic chips, gained another $5 1/8 to $62 5/8 following strong endorsements from Intel (Nasdaq: INTC), Compaq Computer (NYSE: CPQ), and Dell Computer (Nasdaq: DELL).

Electronic component devices maker Methode Electronics (Nasdaq: METHA) rose $3 3/8 to $14 1/8 after reporting Q4 EPS of $0.27, including a $0.03 gain on the sale of a building. Analysts had expected EPS of $0.25.


Several of Baby Bells fell on news of AT&T's (NYSE: T) deal to buy Tele-Communications Inc. (Nasdaq: TCOMA), possibly on fears that the former Ma Bell will soon be entering their markets to provide local telecom service. BellSouth Corp. (NYSE: BLS) slipped $2 1/16 to $67 3/16, SBC Communications (NYSE: SBC) slumped $1 15/16 to $39 5/16, US West (NYSE: USW) stumbled $2 3/16 to $48 1/8, and Bell Atlantic (NYSE: BEL) sank $4 3/16 to $93 9/16.

Some high-flying Internet-related stocks fell back to Mother Earth this morning. Excite (Nasdaq: XCIT) slid $1 3/8 to $81 3/8, Netscape Communications (Nasdaq: NSCP) moved down $7/16 to $25 3/4, Infoseek (Nasdaq: SEEK) dropped $9/16 to $29 7/8. America Online (NYSE: AOL) fell $1 3/4 to $104 1/2 despite signing an agreement to market videotapes from Video Now, a unit of Digital Courier Technologies (Nasdaq: DCTI). Digital Courier also fell $1 5/32 to $8 13/16.

Generic pharmaceuticals and wound care products developer Mylan Laboratories (NYSE: MYL) fell $1 5/8 to $30 6/16 after agreeing to buy topical prescription products maker Penederm Inc. (Nasdaq: DERM) for about $205 million in stock. The deal values Penederm at about $21.89 per share, or a 39% premium to its closing price of $15 3/4 per share yesterday. Penederm jumped $3 3/4 to $19 1/2 on the news.

High-speed digital subscriber line (DSL) products Pairgain Technologies (Nasdaq: PAIR) was pared for a $1 1/16 loss to $18 3/16 after CEO Charles Strauch squelched some of the merger rumors which have swirled around the company lately. "I don't think at the moment acquisitions are a particularly good focus for our company," Strauch said in an interview with CNBC.

Paired share real estate investment trust (REIT) Patriot American Hospitality (NYSE: PAH) was knocked down $1 3/8 to $21 1/8 on a BT Alex. Brown downgrade to "buy" from "strong buy."

High-performance bicycles maker Cannondale Corp. (Nasdaq: BIKE) dropped $1 1/8 to $12 after saying its fiscal Q4 EPS will be about 20% below the Street's estimate of $0.34 due to higher expenses related to the development of a motorcycle. However, the firm's CEO said demand for Cannondale products is "very strong" and in line with expectations.

Microelectronics capital equipment maker FSI International (Nasdaq: FSII) slumped $15/16 to $8 3/8 after reporting a fiscal Q3 loss of $0.09 per share compared with a $0.12 per share loss a year ago. The company said weak dynamic random access memory (DRAM) chip prices and the Asian financial crisis will result in sequentially lower fiscal Q4 sales. FSI also expects fiscal 1999 sales will be 10% to 15% below fiscal 1998 levels.

Healthcare data management firm Transition Systems (Nasdaq: TSIX) fell $4 5/8 to $11 after saying "timing issues with several significant deals" will result in fiscal Q3 revenues between $10.5 million and $12.5 million and earnings between $0.08 and $0.12 per share. The Street had been expecting the company to earn $0.21 per share. Gruntal & Co. downgraded the firm to "hold" from "strong buy."

CMP Media (Nasdaq: CMPX), the publisher of technology magazines and newspapers such as EE Times and Information Week, lost $2 1/2 to $13 3/4 after saying it will report fiscal Q2 EPS between $0.10 and $0.14 compared to $0.29 a year ago because of lower information technology ad sales due to delayed product launches, the Asian financial crisis, and lower earnings in the sector. The IBES mean estimate had called for EPS of $0.30 in the quarter.


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Contributing Writers
Yi-Hsin Chang (TMF Puck), a Fool
Brian Graney (TMF Panic), Fool Two
Alex Schay (TMF Nexus6), Fool, too
Dale Wettlaufer (TMF Ralegh), Final Fool

Brian Bauer (TMF Hoops), another Fool
Jennifer Silber (TMF Amused), Fool at last