Craig Mc Caw's Very Sweet Deal

Chairman Robert E. Allen of AT&T doesn't like to throw money away. But here he is, offering $100 million to Craig O. McCaw and other insiders at McCaw Cellular Communications Inc. without getting one share in return. So what does American Telephone & Telegraph Co. get for its money? Nothing but the right to give the same insiders an additional $600 million. And what would it get for that payment? No more shares. Only the votes it needs to seize control of McCaw Cellular--and, if it chooses, to throw its esteemed partner Craig McCaw out on his ear.

Even the people from AT&T who concocted the plan say they have never seen anything like it. But negotiators on both sides agree that it may be the key to the biggest deal in the short but dramatic history of the U.S. cellular industry. Under terms of the negotiations, made public on Nov. 4, AT&T would pay nearly $3.73 billion for one-third of McCaw shares. McCaw's service would begin to be marketed exclusively under AT&T's logo. By teaming up, the No. 1 players in their respective businesses hope to bring wireless phone service to the masses.

AD BLITZ. To get this far, the two sides had to reconcile clashing objectives. Craig McCaw insisted on keeping control of the company he and his family built. And AT&T's Allen demanded a measure of control over McCaw to safeguard the name of AT&T, which it plans to associate intimately with cellular-phone service in a blizzard of ads.

It's a complicated deal, to be sure, but step by step, here's what they worked out: AT&T will pay $1.97 billion for new McCaw shares and about $1.75 billion for McCaw shares that are held by British Telecommunications PLC. In addition, it will buy a $100 million option from Craig McCaw, his three brothers, and a few other insiders. They hold Class B shares, which have 10 times the voting power of ordinary equity. To exercise that option, AT&T would have to pay the insiders another $600 million. In return, the insiders would swap enough B shares for AT&T's ordinary shares to give AT&T a majority of voting shares.

What crisis might lead AT&T to go through all that? "I'm not going to speculate with you on problems," says Allen, who nonetheless added: "If for some reason, God forbid, the management gets wiped out on an airplane. . . ."

McCaw went looking for a strategic partner in 1990. It considered IBM, Motorola, MCI Communications, Sprint, and General Motors' Electronic Data Systems, among others. But it came back to AT&T because of its clout in marketing and its Bell Laboratories, which invented cellular.

McCaw Director Harold S. Eastman made the first tentative approach, which Craig McCaw followed up in late 1990 with a call to Allen. The talks were put on ice while AT&T did an even bigger deal, last year's $7.4 billion hostile takeover of computer maker NCR Corp. They restarted in late 1991, only to stall this spring. Negotiators were stuck on whether AT&T would pay a little money and have no control, or pay a lot of money and get control from the start.

`A GENIUS.' The breakthrough came in early summer, when AT&T Chief Financial Officer Alex J. Mandl and his negotiating team pitched the idea of a two-stage method for AT&T to get control of the board. McCaw then proceeded to squeeze AT&T for money. "We wanted to provide some hurdle to AT&T taking control through the option," says McCaw Chief Financial Officer Peter L. S. Currie. Currie says his boss regarded $600 million as suitably prohibitive. With that issue settled by Labor Day, AT&T was able to focus on cutting a deal with British Telecom.

As he did in seizing NCR, Allen is proving that he's not cut from the conservative cloth of the old Bell System. Certainly an AT&T-McCaw deal creates huge opportunities, such as the chance to win cellular customers through easier-to-use services and better marketing. But there are risks as well: By competing with other cellular operators that buy its cellular equipment, AT&T could drive them into the arms of competitors. And the stiff price AT&T is paying for McCaw shares (chart) will be worthwhile only if the partnership really does bring a whole new class of callers into the cellular fold.

So how does it add up? Plenty of investors like Allen's boldness: In contrast to the usual pattern in such a deal, AT&T's stock rose by 1 5/8, to 44 3/8, the day after negotiations were announced.

Just the same, Herschel Shosteck, a Silver Spring (Md.) cellular expert, thinks McCaw got the better deal. He cites the slowdown in annual growth of cellular-industry revenue, from 70% in 1989 to perhaps 26% this year. "Craig McCaw is a genius," says Shosteck. "Machiavelli would worship at his feet." McCaw is certainly in the driver's seat: If Bob Allen loses faith in the genius of Craig McCaw, he'll have to cough up $600 million just to take over the wheel.

    Before it's here, it's on the Bloomberg Terminal.