Bell Atlantic, TCI $33-Billion Merger Canceled

In a stunning announcement that upsets expectations for the much-ballyhooed information superhighway, cable television giant Tele-Communications Inc. and Bell Atlantic Corp. on Wednesday said they have canceled their $33-billion merger agreement.

The companies blamed the deal’s collapse on the Federal Communications Commission, which this week voted to reduce cable television rates against the protests of the cable TV industry. But the complex agreement had run into problems long before the FCC decision.

In the more than four months since the announcement of the deal--which would have been the biggest merger in U.S. history--Bell Atlantic’s stock price had plunged more than 20%. The companies also missed three self-imposed deadlines for reaching a definitive merger agreement, as they struggled to overcome a series of complications.

Those included TCI Chief Executive John C. Malone’s growing reservations about the deal, according to well-placed sources. Malone, one of the communications industry’s most aggressive deal makers, is said to have felt increasingly penned in by the Bell Atlantic marriage.

The failed deal may presage problems for other ambitious, technology-driven alliances. The TCI-Bell Atlantic agreement was hailed as a crucial step in making the information superhighway a reality, since the marriage would have allowed people access to hundreds of cable TV channels and new telecommunications services, such as instant home shopping and banking. Together, TCI and Bell Atlantic would have reached 40% of all households in the United States.

The merger agreement triggered a massive dash among other cable TV operators and regional telephone companies--historically adversaries--to join and create joint ventures in expectation of what is to become the biggest economic boom since the Industrial Revolution. Cox Enterprises and Southwestern Bell have already entered into a joint venture. Others are under way.

The alliance also catapulted the normally remote Malone and Raymond Smith, the ebullient Bell Atlantic chairman, to center stage in the telecommunications revolution. The newlyweds made a habit of appearing together at public events, largely as a public relations move.

Malone, who was to become a major shareholder in Bell Atlantic with stock worth well in excess of $1 billion, was going to play a secondary role in the newly merged company to Smith, who clearly relished the fame the deal brought him.

Bell Atlantic is expected to proceed with its interactive TV experiments, even without TCI. The regional telephone company has been a leader among the Baby Bells in pursuing technology opportunities beyond traditional telephone service.

TCI is widely expected to continue its pursuit of other partnerships. Malone has held discussions with at least three major Hollywood companies--MCA, Sony Pictures and Fox Inc. Malone feels that he needs unrestricted access to programming to feed into his cable systems. The collapse of the Bell Atlantic deal also raises the possibility that Malone will again team with QVC Network Chairman Barry Diller, who recently lost the takeover battle for Paramount Communications Inc. Malone was one of Diller’s chief backers before the Bell Atlantic agreement.

Despite all the drama surrounding Wednesday’s announcement, TCI and Bell Atlantic left open the possibility they will cooperate on joint ventures in the future, including the building of high-tech cable/telephone systems and investments in programming.

“This deal is so big and under such a microscope you can’t simply put it on hold,” said one person close to the situation. “If you’re going to revisit it, you have to make a clean break.”

Regardless of the future for TCI and Bell Atlantic, however, the announcement set the stage for a battle royal with Washington. Some observers speculated late Wednesday that the decision was actually a high-stakes gambit by the two companies to embarrass the Clinton Administration--which has been an enthusiastic proponent of a high-tech cable/telephone infrastructure--and get the FCC to reverse its decision to roll back cable TV rates by 7%.

Malone is notoriously disdainful of politicians and regulators who have tried to rein in the cable industry after years of spiraling rates. TCI vigorously attacked the FCC on Wednesday, saying it would cut its capital expenditure program by $500 million.

Smith said in a statement that the “unsettled regulatory climate made it too difficult for the parties to value the future today.” The FCC’s action as well as market “uncertainties,” added Malone, propelled the two companies to conclude “this is not the time to bring our companies together.”

That charge was forcefully rejected by the FCC. Chairman Reed E. Hundt criticized suggestions that the agency’s cable rate vote had undercut the TCI-Bell Atlantic deal. He said the price cut “did not in any way make the future of the cable industry more unsettled.”

James Quello, an FCC commissioner, rejected the notion outright. “I’m afraid this is too convenient,” he said. “They (Bell Atlantic) may be paying too much for it (TCI).”

Indeed, the deal had run into some well-publicized complications over the last several weeks. Although Bell Atlantic’s stock price shot up in the wake of the announcement, shareholder concerns later caused it to plunge so far that Bell Atlantic would have been forced to put up more shares to acquire TCI.

At the same time, concerns were raised over the proper value of TCI’s assets, based on recent regulatory actions. Potentially, the regulations could cut into the cash flow from TCI’s approximately 13 million cable subscribers. TCI and Bell Atlantic executives also were vexed in their efforts to determine how and when to acquire TCI’s programming interests.

Those delays were said to have frustrated Malone. “Malone could not get his hands on the . . . assets that Bell Atlantic could not take in right away,” said one industry executive.

Bell Atlantic officials maintained that all the major issues between the two companies had been resolved, and that it had hoped to announce a definitive agreement next Monday, following a Bell Atlantic board meeting scheduled for Saturday.

Ironically, the decision to break off the negotiations may actually have a beneficial effect on TCI and Liberty Media Corp.’s stock price. Both companies’ stock prices have been under pressure since the merger was announced four months ago.

TCI and Bell Atlantic’s decision to cancel their deal is not supposed to affect a simultaneous deal that TCI has to reacquire Liberty, a company spun off to TCI shareholders three years ago that contains many of TCI’s investments in program services, such as Black Entertainment TV, Home Shopping Network and an ambitious new pay TV movie service called Starz!

Under terms of the original merger agreement, $25 billion had been assigned for TCI and Liberty’s cable TV subscribers and $5 billion for programming investments, which also includes stakes in Turner Broadcasting System and the Discovery Channel.

In addition, $3 billion had been assigned as the value of the so-called “in market” cable TV subscribers--those systems which fell within Bell Atlantic’s service area that federal regulations would have required the merged company to divest.

Although no cable operator was happy about the rate rollbacks ordered this week, several executives in the industry were skeptical that TCI and Bell Atlantic would succeed in pinning their failed deal on Washington.

“I think this was the last straw, and on their way out the door, they are going to take a shot at Washington,” said one cable executive.

The cable TV industry has taken its licks in recent years, with the credit crunch of 1990-1991 putting most deals on hold. After credit eased, the industry endured more uncertainty with the congressional drive to regulate rates, culminating in the passage of a bill in 1992.

After the FCC announced a sweeping set of guidelines last summer, the National Cable Television Assn. predicted that consumers would shave $1.7 billion from their $14-billion tab for non-premium cable programming. TCI said at the time that it would lose as much as $160 million a year.

In 1991, TCI spun off its minority interest in more than two dozen cable companies to create Liberty Media. Although Malone retained his corporate job at TCI, he sold most of his 7% stake in that company and shifted his investment to Liberty, where he received stock options as the spun-off company’s chairman.

Liberty’s stock soon skyrocketed, amid Wall Street enthusiasm for the burgeoning cable networks in which Liberty had invested.

Then last October, TCI and Liberty announced a friendly proposal to merge. If the deal goes through, Malone will own about 20% of the reunited companies.