US West to Buy Cable Firm for $10.8 Billion

In a landmark deal that combines for the first time a major telephone carrier with a leading cable operator, US West Inc. has agreed to buy Continental Cablevision Inc. in a transaction valued at a startling $10.8 billion.

The merger is a harbinger of the consolidation that promises to reshape the telecommunications industry. It is the largest deal to be announced since President Clinton signed into law this month far-reaching telecommunications reform that opens the cable and the long-distance and local telephone businesses to fierce new competition.

Although it is far from clear how this new world will be defined and who will be the surviving players, in theory it is expected to bring lower consumer prices as cable, television and telephone services are bundled under single brand names.

“Clearly, passage of the Communications Act of ’96 has opened a whole new world,” said Amos Hostetter, who co-founded Continental 33 years ago and built the Boston-based, privately held concern into the nation’s third-largest cable company, with 4.2 million subscribers, including nearly 500,000 in the Los Angeles area. “This will be a game of large players.”

The landscape has quickly evolved, even in the last month, with AT&T; investing in the DirectTV satellite dish service and MCI teaming up with News Corp. to enter that business as well. In addition, AT&T; and MCI are negotiating joint strategies for delivering local phone service, while at least two local Bell operating companies, Nynex and Bell Atlantic, have discussed a merger to gird for the new competition.

For many in the cable industry, the high price fetched by Continental affirms cable’s place in the shifting landscape.

“The long-distance carriers have to be thinking, ‘I’m going to get me one of them cable companies,’ ” said Richard N. Yelen, director of marketing for Southern California for Western Communications, which has been purchased by the largest cable owner, Tele-Communications Inc. (TCI). “It’s cheaper to buy an existing wire than build it from scratch.”

AT&T;, for one, recently announced that it would examine cable, among other technologies. While company officials said they are a long way from a decision, the long-distance carrier has negotiated with Time Warner about investing in the company’s cable operations.

While the long-distance carriers may well step into alliances with cable companies to speed their entry into the local phone and video businesses, the regional telephone companies, including Pacific Bell, seem to be betting on other technologies. That makes Englewood, Colo.-based US West something of a renegade.

As its six Baby Bell sisters splintered into two groups developing plans to use satellite and radiowave technologies to offer video, US West singularly plotted a cable strategy, aiming eventually to provide telephone, television and data services through a single wire to the home.

“US West is the only one with a vision, charting a cable course and sticking to it,” said Jessica Reif, a media analyst at Merrill Lynch. “The other Bells are waffling and changing strategies every month. This purchase reaffirms the value of cable.”

In addition to offering phone services to about 10 million households in 14 states in the West and Midwest, US West owns a mid-sized cable system in Atlanta and a 25% interest in a Time Warner partnership that includes Time Warner’s cable interests, Home Box Office and the Warner Bros. studio.

The partnership gives the phone company 50-50 management control over 11.5 million Time Warner cable subscribers nationwide, though the two companies have been locked in a legal dispute stemming from US West’s opposition to Time Warner’s proposed merger with Turner Broadcasting System Inc.

Though the partners seemed to be on the verge of a divorce that would split the Time Warner cable subscribers into two, analysts on Tuesday predicted that the partners might even merge their subscribers into a separate cable juggernaut with 16.2 million subscribers--surpassing TCI as the nation’s largest cable operator.

Some on Wall Street are betting that AT&T; joins in the alliance, giving the partners a firm foundation for a national telephone, video and data brand.

Time Warner praised the Continental purchase on Tuesday, although sources said it had signed off on its partner’s merger plan last May, when US West and Continental came close to a pact after more than two years of talks--before backing off because of disagreement over price.

A $33-billion merger proposed by TCI and Bell Atlantic in late 1993 spurred a flurry of negotiations between telephone and cable companies. That deal fell apart largely because of the cultural clash between the highly regulated phone industry and the cowboy mentality of the entrepreneurial cable business.

The addition of Continental subscribers, concentrated in New England, Florida, California, Chicago and Virginia, will position US West to eventually compete head-on in those markets with bundled packages of services to contend against locally entrenched competitors such as Nynex, Ameritech, Bell Atlantic and Pacific Bell.

US West said it will begin offering telephone service to its cable customers in Atlanta by the end of the year, and is already doing so in Rochester, N.Y., through its partnership with Time Warner.

But skeptics contend the transition could take much longer than US West believes. Cable companies must upgrade systems as well as add devices to transmit information from the home back into the system, a process that can cost up to $300 per customer depending on the age of the cable plant.

“They keep holding out this idea [of offering phone service over cable], but nothing has happened,” said Ameritech spokesman Dave Pacholczyk. “The term vaporware comes to mind.”

Media One, US West’s cable operation in Atlanta, and other cable companies have repeatedly slipped behind original schedules to offer two-way service. Although Continental is generally considered to be further ahead than others in upgrading its wiring, analysts are skeptical of the company’s claims that it will be 50% upgraded when the merger closes by the end of this year.

“The big opportunity [for cable companies] is in cable modems [for Internet access] and even that is several years away,” said John Aronsohn, senior analyst at the Yankee Group, a Boston-based market researcher.

“The business will pan out in the long term [for US West], but it’s going to take a long time to get it running. There are enormously complex issues to deal with.”

Considering the rich price offered for Continental, Wall Street reacted calmly to the purchase. Shares of US West Communications Group, which represents the telephone assets, fell 37.5 cents to $33.50 on the New York Stock Exchange, while US West Media Group, formed last fall to track the cable and new media assets, dropped 50 cents to $21.625.

The stocks of other cable operators reacted surprisingly blandly to the news, reflecting the tepid interest in cable by other phone providers.

US West will pay $5.3 billion in cash and stock and assume about $5.5 billion in debt. Analysts estimated the value at 11.8 times cash flow, compared with the 8 to 10 multiples brought in other recent cable sales.

One investment banker said the deal valued Continental at about $30 a share--almost double the $19-a-share price the company considered last fall in a public offering. Continental filed documents with the Securities and Exchange Commission in October to raise $345 million from the public. The offering was never made, as talks with US West heated up.

“This is a breathtaking price,” said Brian Roberts, president of Comcast Corp., the fourth-largest cable company. “It is a tremendous affirmation of the cable industry strategy and where the value appreciations are going to come from.”

Under the deal, Hostetter, who owned about 30% of Continental, will oversee all of US West’s wholly owned cable properties from Continental’s headquarters in Boston, which will remain intact. He will report to Chuck Lillis, president and chief executive of US West Media Group, which made the purchase.

Less clear is the impact of the transaction on the negotiations between US West and Time Warner. US West filed a lawsuit in September against Time Warner to block its proposed merger with Turner.

US West and Time Warner were trying to restructure the partnership to reduce Time Warner’s debt and spin off cable into a free-standing company. Talks between the two partners bogged down because neither wanted to cede control.

Hofmeister reported from Los Angeles; Helm from Seattle.

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