Facing the Fallout : Broken Engagement Chills Potential for Deals

Tele-Communications Inc.’s withdrawal from its merger with Bell Atlantic Corp. casts a shadow over similar potential deals among cable, telephone and other communications companies.

Also, because TCI blamed the Federal Communications Commission, the merger collapse raises questions about the role of the federal government in the growing businesses of the Information Age.

Analysts felt certain Wednesday that the TCI/Bell Atlantic breakup would cool the widespread enthusiasm for multimedia acquisitions.

The collapse of the deal, valued at $33 billion, is a major personal setback for John Malone, TCI’s visionary president and chief executive, and for Raymond Smith, the technologically astute chairman of the Philadelphia-based phone company.

But, analysts asked Wednesday evening, was it also bad news for other cable companies?

And does the fact that Bell Atlantic shareholders came to oppose the TCI deal mean that other large phone companies will be discouraged from mergers and acquisitions?

Other questions ask whether the FCC opposes mergers as a way for telephone, television and movie companies to gain the technology and distribution channels they need to enter the age of interactive, computerized television known as the information highway--and whether the break up of TCI/Bell Atlantic will affect the pace of technological development as telephones, televisions and computers converge.

The answers begin with the fact that the TCI/Bell Atlantic deal was coming apart anyway. Some analysts speculated that Malone might be using the FCC as a scapegoat to back out of a deal that had gone sour because of growing opposition from institutional shareholders of both the cable company and Bell Atlantic.

That deal, announced Oct. 13, was due to be renegotiated or killed, analysts said, because Bell Atlantic’s falling stock price and reversals for TCI had made the merger terms onerous for both sides.

But some analysts saw a warning to the FCC as well. They noted that the agency issued rules Tuesday mandating a 17% rate cut for cable companies--an additional 7% cut on top of a 10% cut ordered last year--and that cable companies objected, saying reduced revenue would hamper their ability to compete in the new communications era.

These analysts, noting that the new FCC rules do not take effect for 30 days, speculated that Malone’s deal-breaking announcement was a “brush back pitch to the FCC,” putting the agency on notice that it should change its rules.

Wednesday evening, FCC Chairman Reed Hundt denounced suggestions that the FCC’s action had harmed the deal. He said the rate cut “did not in any way make the future of the cable industry more unsettled.”

Still, cable company ambitions to bring telephone services to homes, along with television channels, have taken a blow because cable companies need cash-rich partners if they are to build new fiber-optic networks for such services.

That was the key to Malone’s sale of his company to Bell Atlantic in October. The 52-year-old Malone, who built Englewood, Colo.-based TCI into a communications powerhouse with $3.5 billion in revenue, had announced plans early last year to invest $2 billion in fiber lines so TCI could deliver telephone services.

But the investment markets were not encouraging his plans. TCI, like most cable companies, carries a large debt load, the residue of years of borrowing to lay out its networks.

Investors now are looking for cable companies to retire some of their debt and begin to show profits and pay dividends.

*

Thus, Malone sought a merger with Bell Atlantic, which, like most of the regional Bell operating companies, has enormous annual cash flow--income of $1.4 billion plus depreciation of $2.4 billion.

In the merger deal, Bell was to pay a multiple of TCI’s cash flow. So the FCC’s latest action could have affected the final price to TCI shareholders.

But Bell’s shareholders were also balking at the prospect of their company paying out more than 220 million shares and diluting their ownership to acquire TCI.

Steady selling in recent months had driven Bell’s stock price below a level it had guaranteed for the merger.

That opposition by Bell Atlantic shareholders could well be a signal to other phone company managers not to be so eager to pay generously to acquire liaisons with cable and other communications companies.

Admittedly, this deal was bigger than other phone cable hookups, such as US West’s $2.5-billion investment in Time Warner’s entertainment division.

As to FCC policy, communications experts say the agency has generally favored combinations among companies to foster development of the new technologies. And they recalled that Vice President Al Gore, in a major speech at UCLA, had encouraged companies to combine in new ways to extend the information highway to schools, workplaces and homes.

Meanwhile the technologies of interactive digital communications, wireless telephony and satellites, computerization and signal compression, continue to develop. And most analysts saw no great effect on the pace of such developments in Malone’s scuttling of his deal with Bell Atlantic.

* MAIN STORY: A1