AT&T's $48bn cable deal is a one-stop-shop revolution

AT&T, THE largest telecommunications operator in the US, said yesterday that it would buy TCI, the largest cable operator. The deal, worth $48bn (pounds 29bn), heralds a massive transformation in telecommunications.

It means that AT&T, the main company spun off from the old Bell telephone monopoly, will be able to go back into local phone services. Combined with the consolidation of the local phone companies, it is part of a second revolution after the break-up of Ma Bell.

AT&T said it will buy Tele-Communications Inc (TCI) in a stock swap valued at $31.8bn. It will also take on $11bn of TCI's debt and buy back stock from TCI for an estimated $5.5bn.

The keystone of the deal is that the two companies will combine AT&T's long-distance, wireless and Internet services with TCI's cable, telecommunications and Internet businesses into a company to be called AT&T Consumer Services, providing a one-source, one-cable link for all services to consumers.

AT&T, the main long-distance phone operator in the US, was formed as a result of the divestment of Bell after a ruling by a US judge in 1982.

The latest deal satisfies a key strategic requirement for the company, which is under siege in its core market of long-distance telecommunications. Though it has a 60 per cent market share, the spun-off Baby Bells could soon knock a hole in that: the 1996 Telecommunications Act allowed them to enter the long-distance market while also opening the local market to competition.

Since the break-up of Bell, AT&T has not owned any local phone lines: though it has a vast infrastructure for long-distance and international calls, it lacks the "last mile" from the exchange to the consumer's house or office.

Rebuilding a network would prove hugely costly. AT&T tried to get back into the business by leasing lines off the local Baby Bells, but this strategy was not cost-effective and was ended by Michael Armstrong when he took over as chairman and chief executive last year.

TCI already has a local infrastructure wired into homes. When the merger is complete, AT&T Consumer Services' wholly-owned and affiliated cable systems will pass 33 million homes, a third of the US. The deal will require substantial investment in TCI's existing cable systems, which will have to be overhauled to allow two-way traffic.

"Today we are beginning to answer a big part of the question about how we will provide local service to US consumers," Mr Armstrong said yesterday. The new company "will bring to peoples' homes the first fully integrated package of communications, electronic commerce and video entertainment services," he said.

One of the key aims of the new company will be to tap into the rapidly- growing Internet market more efficiently. AT&T already has its own AT&T WorldNet Services and TCI has a stake in @Home Network with Cox Communications and Comcast. Internet connection is usually by local call.

The deal will also package TCI's Liberty Media Group, its programming arm, with TCI Ventures group, its technology investment unit. TCI has stakes in some of America's most popular cable networks, including Discovery, Black Entertainment television, Fox/Liberty Networks, QVC and regional sports channels. TCI Ventures includes stakes in the Sprint PCS cellular network, TCI International and the United Video Satellite Group.