U.S. Officials Welcome Proposed Deal’s Potential to Stimulate Competition

Federal regulators and lawmakers--eager for a sign that their more than decade-long effort to jump-start telephone competition is finally paying off--reacted positively Wednesday to reports of AT&T;’s plans to buy cable TV giant Tele-Communications Inc.

But the deal still could face tough going at the state and local level, where AT&T; will have to negotiate with local cable TV franchise boards, state public utility commissions and even city and county building departments for the permits that it will need to build and operate its local telecommunications facilities.

“They face a long uphill battle,” said Michael J. Mahoney, president of RCN Corp., a Princeton, N.J.-based communications company that has attempted to bundle cable and telephone services similar to what AT&T; is expected to offer.

The AT&T; deal must be approved by the Federal Communications Commission and federal antitrust authorities. The acquisition would give the long-distance giant access to 20.5 million cable TV households and create a powerful new rival to regional Bell telephone companies.

In a speech Wednesday, FCC Chairman William E. Kennard seized on the deal as vindication of the controversial Telecommunications Act of 1996, which was expected to enhance competition in the communications industry.

Although Kennard said he would reserve final judgment until his agency could review all the details of the deal, he added, “If AT&T; and TCI make a strong commitment to bring residential consumers more choice in local telephone and high-speed Internet access services, then this proposed merger is eminently thinkable.”

The FCC’s positive reaction to AT&T;’s proposed acquisition of TCI is important. That’s because most legal experts believe the FCC’s examination of the deal is far more crucial than the federal antitrust review, which is likely to find few if any legal barriers preventing AT&T; from acquiring a company it doesn’t compete with.

“This is going to be very well-received in Washington because it represents an endorsement of an approach to local competition that uses cable TV facilities to offer telephone services,” said Phil Verveer, a veteran Washington communications lawyer who headed the legal team at the Justice Department that broke up the AT&T; Bell monopoly and who now represents TCI.

“AT&T; is not really in the local telephone business, and that is the difference between this deal” and other recent telecommunications industry mergers, Verveer said.

Justice Department and Federal Trade Commission officials have not yet decided which of the two antitrust agencies will review the deal, Atty. Gen. Janet Reno said.

But Assistant Atty. Gen. Joel Klein said that if his antitrust division does review the merger, “we’ll look at the merger and determine whether it’s good for consumers and good for America, or not good for consumers, and we’ll take action accordingly.”

Some consumer groups and Congressional leaders expressed reservations about the potential impact of the deal on cable TV rates, which have long been a political lightening rod in Washington because of the huge voter outcry over past rate hikes.

Federal telecommunications policy “ignores marketplace realities and forces companies that are forestalled from competing to take the simpler route of merging,” said Sen. John McCain (R-Arizona), chairman of the Senate Commerce Committee. “Where will it all end?”

And TCI’s brilliant but volatile Chairman John Malone remains a political lightening rod in Washington among consumer groups who cite him as one of the key factors triggering the renewed regulation of the cable industry in 1993, following a voter outcry over double-digit cable TV rate increases.

AT&T; also has been tarnished recently by a reputation of promising one thing and delivering another.

“What I’m fearful of is that AT&T; is going to use the cable monopoly as a cash cow to increase profits and may only experiment with offering local phone service but not actually deliver it,” said Gene Kimmelman, co-director of the Consumers Union’s Washington office.

“Because of our recent experience with AT&T; and other long-distance carriers raising rates despite making public commitments to bring costs down, we are going to ask regulators to establish some sort of enforceable mechanism to keep a lid on cable rates,” Kimmelman said.

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Details of the Deal

AT&T; Corp. would pay approximately $46.5 billion to acquire Tele-Communications Inc.

That includes roughly $31 billion AT&T; would pay for TCI’s stock and the assumption of about $11 billion of TCI debt.

AT&T; would pay about $5 billion to buy back some of its own shares to be issued to TCI as part of AT&T;’s pending $11.3-billion acquisition of Teleport Communications--a local-business phone unit of which TCI is a major owner. The sum also includes AT&T; acquiring from TCI its controlling interest in @Home Corp., which provides Internet service through cable-TV lines.

After the merger, AT&T; would create a subsidiary, AT&T; Consumer Services, that would include AT&T;’s consumer long-distance, wireless and Internet services with TCI’s cable, telecommunications and Internet businesses. The new company would be publicly traded as a “tracking stock” that would follow the Consumer Services unit’s performance.

A tracking stock, or “letter stock” is supposed to track the financial performance of a specific business unit within a company, allowing the market to place a value on that unit as a piece of the overall corporate pie. But tracking stocks don’t give their holders actual ownership of the divisions they represent, because those units are wholly owned by the parent company.

Liberty Media, TCI’s cable programming arm, would continue to be owned by TCI Chairman John Malone. AT&T; would have no ownership or management role in Liberty but would issue a separate tracking stock for it.

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Source: AT&T; Corp.