Southwestern Looks to Enter Cable Race : Communications: Baby Bell near an agreement with Cox, Bass Group that would create third-largest system.

Southwestern Bell Corp., Cox Enterprises and the Robert M. Bass Group are close to an agreement that would create the nation’s third-largest cable TV company, industry sources said Thursday.

The deal would be the latest marriage between a cable TV operator and a telephone company as the major players in the telecommunications industry race to realign themselves to pave the way for an anticipated future of interactive television and hundreds of channels.

In a two-step deal, Southwestern Bell would trade stock for a 440,000-subscriber cable TV system in metropolitan Atlanta controlled by Bass Group. Southwestern would then pool the system into a newly created joint venture with the big cable systems owned by Cox, the sources said.

Southwestern Bell will also contribute the cable systems in suburban Washington to the joint venture, sources close to the transaction said. It acquired those systems from Hauser Communications earlier this year.

Neither Southwestern Bell nor Cox would comment on the deal. Representatives of Bass Group, in Texas, could not be reached. Southwestern Bell fell 50 cents Thursday to close at $42.125 on the New York Stock Exchange.

A media giant that was once considered somnolent, Atlanta-based Cox owns 17 daily newspapers, including the Atlanta Journal-Constitution, and cable systems with 1.7 million subscribers. Those systems make Cox the sixth-largest U.S. cable TV operator.

In recent months, Cox has made some bold moves, including an agreement to invest $500 million toward QVC Network’s tender offer for Paramount Communications. Earlier this year, Cox teamed up with Southwestern Bell to provide cable TV and phone service in Britain.

Cox, which had revenue of $2.5 billion last year, also owns 19 radio and TV stations.

By spinning off its cable TV systems into a separate company, Cox may be able to retain ownership of WSB-TV in Atlanta, which federal regulations otherwise would force it to divest.

Under federal rules, a company cannot own TV stations, newspapers or cable TV systems in the same market unless they are “grandfathered,” meaning the co-located media properties were owned by the same company before the rules went into effect.

But analysts said Cox could either seek a waiver from the Federal Communications Commission or structure the deal in such a way that it would not be deemed to have controlling interest in the new cable company.

Southwestern Bell has been holding discussions with the Bass group regarding the Atlanta cable TV system for more than a year. Sources said the Baby Bell was close to an agreement to buy the system for $1.2 billion, but the deal fell apart and Southwestern Bell later bought the 225,000-subscriber Hauser systems near Washington for $650 million.

The Southwestern Bell-Cox joint venture would control a total of 2.3 million subscribers, making it the third-largest cable TV operator in the country behind Tele-Communications Inc. and Time Warner.

Over the last several months, Baby Bell and cable TV companies have been merging or forming strategic relationships at a dizzying pace. Earlier this year, US West agreed to acquire 25% of Time Warner Entertainment for $2.5 billion, and Nynex has agreed to invest $1.2 billion in Viacom Inc., parent company of MTV, as part of Viacom’s tender offer for Paramount.

In the biggest deal of all, TCI has agreed to merge with Bell Atlantic Corp. in a venture valued at roughly $30 billion.

Cable TV companies and telephone companies are joining forces because each has something valuable that the other wants.

Telephone companies have wired virtually every household in their service area and want to deliver the wide variety of program and information services controlled by the cable companies. The cable operators, on the other hand, want to use their cable TV wires to go into the phone business, delivering voice, data and video over broad-band fiber-optic lines.

“They are looking for geographic expansion,” Steven R. Yanis, communications analyst at Kidder, Peabody & Co., said of Southwestern Bell.

San Antonio-based Southwestern Bell had $7.7 billion in revenue last year. It provides telephone services to 13 million subscribers in Texas, Oklahoma, Missouri, Kansas and Arkansas.

The company also owns a 10% share in Telefonos de Mexico, which provides cellular and long-distance phone services across the border.

Times staff writer Leslie Helm contributed to this story.

* TCI MAY BACK OUT: Giant cable system reconsiders investing in QVC’s offer for Paramount. D2.