Judge Blocks AT&T;’s Plan to Acquire McCaw Cellular

A federal judge ruled Tuesday that American Telephone & Telegraph Co.’s proposed $12.6-billion acquisition of McCaw Cellular Communications Inc. violates the landmark consent decree that broke up the phone monopoly 10 years ago.

The decision, which could scuttle perhaps the most important such deal in years, was handed down by U.S. District Judge Harold H. Greene, who issued the consent decree in the first place and whose rulings have helped shape telecommunications ever since.

The ruling, along with a recent decision by the Federal Communications Commission to roll back cable rates, were strong signs that the government will continue to play an important role in determining the nature and speed of the telecommunications revolution.

AT&T; moved swiftly to squelch any notion that Greene’s ruling would end the proposed merger and vowed to win him over to its point of view. “Judge Greene didn’t foreclose AT&T; being granted a waiver,” the giant company said in a hastily issued statement. “In fact, he left the door wide open to us to demonstrate why such a waiver is in the public interest.”

The proposed AT&T-McCaw; merger would be one of the largest in corporate history. It would integrate AT&T;’s long-distance network with McCaw’s national local cellular networks to create a form of national cellular service. The deal was announced in August as part of an ongoing consolidation in telecommunications.

In December, 1992, Sprint acquired Centel Corp., the 11th-largest cellular company, and MCI has since said it would invest $1.3 billion in Nextel, a prominent player in wireless communications.

While much attention has been paid to the concept of high-speed networks of fiber-optic and coaxial cables, wireless technology is considered crucial to an Information Age in which users can be served anywhere.

AT&T;’s merger plans have come under a cloud at the same time some other big deals in telecommunications have collapsed. Also on Tuesday, Cox Cable Communications and Southwestern Bell Corp. scrapped their tentative agreement to form a $4.9-billion cable television partnership, blaming the FCC’s recent decision to cut cable TV rates 7% on top of a 10% rollback that went into effect last year.

And in February, cable TV giant Tele-Communications Inc. and Bell Atlantic Corp. called off their merger plan, also attributing the cancellation in part to the FCC rate rollback.

AT&T; said it would revise its petition and is confident that the deal will go through. Industry analysts were less optimistic, giving the deal a 50-50 chance. A number of other obstacles, such as FCC approval, remain.

Greene’s ruling also raises questions about the applicability of the consent decree to a new era of telecommunications. In the interest of breaking up a monopoly, the decree separated the long-distance market from local calling, the wireless carriers from the wired, and created rules that prevented long-distance and local phone companies from entering one another’s businesses.

Now, with new technology making possible all sorts of services, cable firms want to provide telephone service and phone companies want to provide movies-on-demand. Local exchange carriers want to compete in the long-distance market and long-distance phone companies want into the local markets. They are all jockeying for a “level playing field.” And Greene, who authored the original consent decree in 1982, holds a good many of the cards.

“I think the problem is that regulators and judges are preventing convergence and standing in the way of society’s benefits,” said Berge Ayvazian, senior telecommunications analyst at the Yankee Group, a Boston consulting firm. “These companies should be unleashed to allow the next era of telecommunications to come forth with full participation from all competitors.”

AT&T; needs Greene’s approval because McCaw holds minority interests in cellular companies in which two regional Bell companies also have ownership interests.

One provision in the decree bars AT&T; from acquiring the stock or assets of any regional Bell firm. The Justice Department also has been reviewing whether the proposed deal violates antitrust laws but has yet to take a position on the acquisition.

At issue is whether the prospects for local telephone competition will be increased or decreased by the merger. If AT&T; can persuade Greene that competition would be enhanced, the deal may yet go through.

Indeed, local exchange carriers, who have been denied the right to compete in video and long-distance markets, argued against granting the AT&T-McCaw; waiver on the basis that it would give the long-distance carrier an unfair advantage in the local market.

Two bills are pending in Congress to allow for more competition and “convergence” between communications firms. Cable, phone and wireless firms have made the case that a new communications infrastructure--which would provide consumers with videos-on-demand, home shopping, teleconferencing and access to vast databases of information--will be so expensive that they need to pool some of their resources to make it happen.

But in his ruling Tuesday, Greene rejected AT&T;’s petition: “In the court’s view, there can be no serious doubt that the merger would indeed violate the plain and express language of the decree,” Greene said in the 23-page ruling.

”. . . It is the obligation of this court to enforce the decree as it is written.”

Bob Ratliffe, a spokesman for McCaw in Kirkland, Wash., described Greene’s ruling as “a request for information,” saying that the judge for some reason had not received some pertinent information that had been filed with the FCC.

BellSouth, a regional Bell company based in Atlanta, was the first to lodge a protest against the proposed merger with Greene.

“We’re pleased with the ruling,” William Barfield, BellSouth’s associate general counsel, said in a statement. “It means that AT&T; has to demonstrate in open court that a modification of the decree is in the public interest and is justified by changes in law and facts since the decree was entered.”

BellSouth’s protest grew out of its opinion that, by acquiring McCaw, AT&T; was effectively “re-acquiring” pieces of Bell operating companies, something that the decree prohibits. BellSouth, with McCaw, owns 60% of one of the two cellular companies operating in Los Angeles and about 50% of a cellular company in Houston.

* INFO HIGHWAY SETBACK: Southwestern Bell and Cox Cable scrap partnership. D1