Cox, Southwestern Bell team

Cox Cable, the sixth-largest multisystem operator in the country, and Southwestern Bell Corp. have formed a $ 4.9 billion partnership to buy more cable systems and — down the road — pour money into cable networks and new programming services like movies on demand.

Among the wave of recent cable-telco deals, this one represents the first set up primarily to buy other cable operators.

The rumor mill had spun out reports about the deal for the last month, so the main surprise was in some of the details of the transaction. Cox will bring to the new partnership 1.62 million subscribers in 21 owned cable systems, which together have a net worth of about $ 3.3 billion. The regional telephone company’s contribution will be an initial investment of $ 1.6 billion to expand that subscriber total to as many as 4 million, mostly through buyouts of smaller cable operators. Cox will own 60% of the new venture, the Baby Bell 40%.

“We look on this deal as an attractive business opportunity that will allow us to expand into entertainment services and interactive multimedia,” said Jim Adams, the group president of Southwestern Bell responsible for cable TV, in a teleconference hookup with reporters.

But he added that he’s playing down the “hype,” which claims that interactive movies on demand, plus home shopping, videogames and TV lotteries, will funnel tens of billions of dollars into the telco/cable coffers within the next decade. As Adams put it, “The marketplace will determine the success rate of these new applications.”

Southwestern Bell earned $ 1.3 billion profit on $ 10.0 billion revenues last year. Cox is privately held and does not disclose its financial results.

Some systems exempt

The Cox cable systems in Lubbock, Texas, and Oklahoma City will not be part of the agreement because they operate within Southwestern Bell’s five-state service area (Texas, Oklahoma, Arkansas, Kansas and Missouri), where federal law prevents telcos from owning cable systems.

Another participant in the teleconference, Jim Kahan, senior VP of strategic planning and corporate development for Southwestern Bell, said the partnership will flourish “outside the five states we’re responsible for” as “a growth vehicle” for businesses like “video-on-demand and interactive.”

Although Southwestern Bell execs declined to say why, it will not put the two suburban Washington, D.C., cable systems it’s buying from Hauser Communications into its venture with Cox.

And if the QVC offer to buy Paramount Pictures is successful — Cox has ponied up $ 500 million to join QVC in the bid — Southwestern Bell says it will not include the Paramount stake in the new partnership.

Also not part of the deal, said Jim Robbins, president of Cox Cable, will be Cox’s ownership stakes in the Discovery Channel, E! Entertainment Network, the five-channel Viewer’s Choice pay-per-view setup, the Sunshine Network (a regional sports operation out of Florida), and two new British channels, U.K. Gold and U.K. Living.

“We haven’t had time to sort through these program holdings to determine whether they’re appropriate” to the partnership, Robbins said. Robbins will be CEO of the Atlanta-based joint venture, with Cox and Southwestern Bell each having two seats on an executive committee.

Kahan said that any or all of these cable networks could end up in the deal at some point in the future.

Southwestern Bell and Cox are natural allies, Kahan continues, because the two companies share in a 25% stake in two cable operations in the United Kingdom: Midlands Cable Communications Ltd. and North West Cable Communications.

One of the lures of Cox’s domestic cable systems, said Don Kiernan, chief financial officer of Southwestern Bell, is “the substantial size of its operation. The average Cox system serves 77,000 subscribers, compared to the industry average of 12,000. And Cox’s revenues-per-subscriber are higher than the industry average.”

In the wake of the deal, Moody’s Investor Service placed the debt ratings of Southwestern Bell and Cox Enterprises under review for possible downgrade. For Cox it’s an expanded review — Moody’s has already flagged Cox over the potential risks of its $ 500 million investment in QVC.

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