AT&T-led Consortium & Yahoo Taking Stake in Net2Phone
By Matt Paolucci

In the latest round in AT&T's war to gain a leg up over rival America Online, the telephone giant is leading a consortium that will acquire a $1.4 billion, or 39 percent voting stake, in Internet telephony provider Net2Phone.

Under the deal, the consortium, which includes Liberty Media (LMGa) and British Telecom (BTY), will purchase 4 million newly issued Class A shares from Net2Phone for $75 a share.

The consortium also will purchase 14.9 million Class A Net2Phone shares from IDT Corp. (IDTC), currently Net2Phone's controlling shareholder, for $75 per share.

Of the $1.4 billion invested, AT&T will account for 51 percent of the total. The transaction, which has been approved by the boards of AT&T, IDT and Net2Phone, is expected to close by the third quarter.

AT&T said it expects the transaction to be neutral to cash earnings per share and minimally dilutive to earnings per share for the next few years.

"Net2Phone has established itself as the Internet's very own phone company," said AT&T CEO C. Michael Armstrong in a statement. "It handles two out of every five calls routed over the Internet."

Armstrong said the group aims to make telephones, Web pages and fax machines extensions of each other.

In addition, the consortium and IDT have reached an agreement giving the group the right of first refusal to purchase IDT's remaining stake of 10 million Class A shares in Net2Phone.

If the right is exercised, the consortium will have a 59 percent voting interest and a 48 percent economic interest in Net2Phone.

The Net2Phone deal is the second salvo fired this week by AT&T at AOL. Earlier, AT&T said it's considering combining its WorldNet Internet service and Excite@Home (ATHM) broadband cable service. The Excite@Home deal puts pressure on AOL, which is merging with Time Warner (TWX).

It was reported last month that AOL, which has a minority stake in Net2Phone, and Microsoft(MSFT) also tried to ink a deal with Net2Phone. AOL planned to sell telephone service to its user base. The AOL/MSFT deal, first rumored in February, was hung up on price.

AT&T's Armstrong, who hasn't shied away from paying top dollar for acquisitions, beat AOL's bid by a wide margin.

On top of Net2Phone's investment from the AT&T consortium, Internet search engine Yahoo! Inc. (YHOO), announced today it has acquired a minority stake in Net2Phone through a $150 million stock swap.

Yahoo! said it acquired 2.8 million shares of Net2Phone in exchange for about 806,000 Yahoo! shares. The 2.8 million shares give YHOO roughly a 5 percent stake in Net2Phone.

Shares of Net2Phone (NTOP) were up $3.75 to $59.13 on the news after trading as high as $66 intraday. AT&T (T) closed down $1.50 at $56.31.