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SBC, Prodigy to Combine Internet Units

Added: (Tue Nov 23 1999)

Pressbox (Press Release) - By Barbara Etzel

NEW YORK (Reuters) - SBC Communications Inc. (NYSE:SBC - news), the No. 1 local telephone operator, and Prodigy Communications Corp. (NasdaqNM:PRGY - news) on Monday said they agreed to combine their consumer and small business Internet operations.

The deal gives San Antonio, Texas-based SBC a 43 percent equity stake in Prodigy and gives the White Plains, N.Y.-based Web provider access to SBC's high-speed Internet technology and increased presence in the U.S. Spanish-speaking market.

Under the terms of the deal, which is expected to close within three to six months, SBC will make Prodigy its exclusive retail consumer and small business Internet access provider to the roughly 100 million people living in its service area.

Prodigy will assume management of SBC's current 650,000 dial-up phone-line and high-speed Internet access customers, bringing Prodigy's subscriber base to more than 2 million customers, the companies said.

Shares of Prodigy closed down 1-1/8 to 31 Monday on the Nasdaq stock market. SBC shares fell 1/8 to 51-3/8 on the New York Stock Exchange.

"In one fell swoop, Prodigy has become a consumer broadband access leader," said Ted Broomfield, an analyst with SoundView Technology Group. U.S. Internet service providers are racing to strike deals that would allow their subscribers to upgrade to these higher-speed connections from slower dial-up links.

In addition, SBC pledged to deliver a minimum of 1.2 million new customers over the next three years as it exclusively markets the Prodigy service.

Further financial terms of the deal were not disclosed.

Prodigy will be able to tap SBC's $6 billion capital investment in high-speed digital subscriber line (DSL) technology. SBC is the leading U.S. provider of such high-speed links with more than 100,000 customers, the companies said.

As part of the deal, Prodigy said it will make DSL its preferred method of high-speed Internet access offering, even in regions where SBC does not operate. Alternative methods of high-speed access include connections over two-way cable television networks and via broadcast satellite transmission.

In a conference call with reporters, SBC officials said that while Prodigy would become SBC's retail access brand, the telephone operator would continue to offer wholesale high-speed Internet access to other customers. SBC said its deal to supply high-speed Internet access to America Online Inc. (NYSE:AOL - news), the world's largest supplier of Internet 'services, would continue.

Jim Preissler, PaineWebber's Internet analyst, said that he doesn't believe the exclusivity provision will affect wholesale relationships such as AOL's. Currently AOL is rolling out DSL service with SBC and Atlantic Bell.

Prodigy, which is backed by Mexican telecommunications giant Telefonos de Mexico (Telmex) (NYSE:TMX - news) (TELMEXL.MX) and Telmex-controlled Carso Global Telecom (CGTa1.MX), will gain new reach among U.S. Spanish speakers. Prodigy already provides a bilingual Internet service for both English and Spanish speakers.

SBC is the dominant local telephone provider in the Southwestern United States, the Midwest and in California and Nevada, where 60 percent of the 30 million U.S. Spanish speakers and nine of the top 10 largest metropolitan Latino markets are located.

Prodigy will contribute its assets to a new limited partnership that would be operated under the brand name Prodigy, and which would operate Prodigy's business. The partnership will be 57 percent owned by Prodigy and 43 percent by SBC.

SBC will have the right to convert its interest in the operating partnership into a direct equity interest in Prodigy. Current stockholders of Prodigy will remain stockholders of Prodigy, and Prodigy's common stock will remain listed on the Nasdaq stock market, the companies said.

SBC officials sought to assure shareholders that Prodigy would remain independent. "We don't have anything in the agreement that allows us to increase our interest," Stephen McGaw, SBC managing director for corporate development, told reporters.

The deal is subject to regulatory and shareholder approval, and a special stockholders meeting is planned for early 2000. Telmex and Carso have agreed to vote in favor of the deal, the companies said.

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