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SBC, Prodigy Merge Consumer Operations

SBC Communications Inc. and Prodigy Communications Corp. agreed Monday to merge their consumer and small business Internet operations.

To implement the agreement, Prodigy will contribute its assets and liabilities to a new limited partnership, to be operated under the existing Prodigy brand name. Under the new operating partnership, Prodigy will own a 57 percent stake and SBC will own the remaining 43 percent.

The boards of both SBC and Prodigy have approved the transactions, which will take about six months to achieve regulatory approval. The deal, which fuels the two companies' ambitions to become a leading DSL provider in the United States, also requires the approval of the Prodigy stockholders. Prodigy plans to seek stockholder approval at a special meeting of stockholders in early 2000.

By partnering with SBC, Prodigy would be able to leverage SBC's $6 billion Project Pronto DSL deployment scheme. SBC's Project Pronto is a broadband deployment plan designed to deliver DSL services to nearly 77 million Americans throughout SBC's operating region over the next three years. When completed, Project Pronto will make SBC the single largest broadband provider in the U.S.

Edward E. Whitacre Jr., SBC chairman and chief executive officer, said the alliance would enable SBC to dramatically improve their customers' online experience and provides a vehicle for the company to capitalize on the growth opportunities in the Internet marketplace.

"This initiative is further proof of our commitment to broadband leadership," Whitacre said. "Our alliance with Prodigy builds on our aggressive $6 billion broadband deployment and their already-strong industry ranking to position us as a leader in the emerging high-speed consumer Internet access market."

The deal places Prodigy in a prime position to supply and grow consumer demand DSL services in SBC's territory.

Samer Salameh, Prodigy chairman and chief executive officer, said that broadband access will redefine the ISP playing field and that DSL is clearly emerging as the technology of choice.

"We now are better positioned than virtually any other ISP to become a leading player in the high-speed Internet access arena-giving our customers the Internet experience they've been asking for, which we believe will increase shareholder value," Salameh added.

Under terms of the agreement, SBC will make Prodigy its exclusive retail consumer and small business Internet access service to the approximately 100 million Americans in its service area.

Prodigy will assume management of SBC's current 650,000 dial-up, ISDN and basic DSL Internet customer base. SBC currently provides DSL services to more than 100,000 customers. The deal means that Prodigy's total managed subscriber base totals more than 2 million subscribers nationwide.

SBC will exclusively market Prodigy Internet services through its telecommunication channels, and is committed to deliver a minimum of 1.2 million new customers over the next three years to Prodigy's subscriber base.

James D. Gallemore, SBC executive vice president for strategic marketing and planning, said the deal would massively expand Prodigy's broadband services.

"In effect, we're creating a broadband-focused ISP that is going to dramatically change what it means to be online - giving us the ability to attract and retain customers in the 'new' high-speed Internet market," Gallemore said.

"This deal will make SBC/Prodigy 'the' place to go for DSL Internet access and give both SBC and Prodigy the Internet currency to grow well into the next millenium," he added.

Salameh said Prodigy's partnership with SBC would play a key role in fueling Prodigy's continued growth.

Further teams of the deal provide for Prodigy to use promote SBC as its preferred provider of telecommunications services. Prodigy service will be co-branded with SBC's regional brands for both current and new SBC customers.

Elliot Prince, an analyst at Wit Capital Corp. (WITC), said there is a going belief in the marketplace that companies need to gain critical mass in order to survive.

"There is a basic thesis in the business that companies have to gain critical mass by adding lots of subscribers through consolidation," Prince said.

Prince added that the SBC, Prodigy deal is a straightforward agreement to buy subscribers.

"On one level, all this deal really means is that Prodigy bought themselves a lot of subscribers." Prince said. "A fast growing subscriber base it provides them a good basis for DSL services because SBC is throwing a lot of money into building the infrastructure."

Prince added none of that broadband buildout costs are going to be Prodigy's headache, yet the partnership with SBC allows them to receive all the benefits the massive high-speed deployment.