The convergence of the telephone and cable industries was hit with another setback Tuesday when Cox Cable and Southwestern Bell called off their $ 4.9 billion partnership. Citing the FCC’s new cable rate regulations, the telco said it is unlikely the cable industry can generate the cash flow it expected.

“The Clinton administration wants to build the information superhighway and the FCC keeps bombing the bridges,” said James Robbins, president of Cox Cable.

Jim Kahan, Southwestern Bell’s senior VP of strategic planning and corporate development, said the FCC’s Feb. 22 decision to cut cable rates by an additional 7% on top of last year’s 10% “significantly hinders the ability of the partnership, as initially structured, to meet its growth and financial objectives.”

But the FCC is not buying those arguments. Federal Communications Commission chairman Reed Hundt said the new rules will in no way put an end to new ventures (see story, below).

Under the terms of the deal, Southwestern Bell was to pay Cox Cable $ 1.6 billion to expand the latter’s programming interests and double its current subscriber base of 1.6 million. In return, the telco was to get a 40% ownership stake in Cox Cable with an option to increase the stake to 50%. Cox’s cable subscriber base has an estimated value of $ 3.3 billion. None of Cox Enterprises’ other holdings were part of the venture.

“We looked at regulatory trends, and we concluded thetrend is moving toward more regulation rather than more competition,” said Kahan at a press briefing. “The shame is that this was one (deal) that was a good fit, and regulation kept it from being done.”

The Cox-Southwestern Bell partnership is the second major deal to be derailed since the FCC announced its intention to further cut rates. Several weeks ago, Tele-Communications Inc. and Bell Atlantic called off their merger, which was initially valued at $ 33 billion.

Jones Intercable, the nation’s seventh-largest cable operator, also blamed the FCC for the restructuring of its $ 400 million venture with Canadian telco Bell Canada Intl.

While both the telcos and cable companies were aware before these partnerships were announced that the commission was planning to revisit rate regulations, Cox Cable president Robbins told Daily Variety that it was the “attitude” of the FCC that scared Southwestern Bell.

“I think it was the tone and the texture of the new rate regulations that just scared the hell out of our hopeful partner. They have spent a lifetime trying to get out from under regulation and here it looks like our climate was getting worse, not better,” Robbins said.

Although Cox and Southwestern Bell said three weeks ago they were going to renegotiate the deal in the wake of the FCC’s regulations, Robbins said talks never even got to price. “Clearly both companies have run numbers. Nobody knows what the rules are and that truly killed the deal.”

Cox was willing to see how the regs played out; Robbins said Southwestern Bell was not.

“If there is a difference between the two companies it is that we believe in the long term and see the hurt in the short term. So do they, but they were not willing to put up with it.”

The collapse will have no impact on the companies’ joint ventures in Europe, where they are working together to provide telephone service in the U.K.

While industry analysts agree that the new rate regs are a big blow to the cable industry’s bottom line, some think the venture’s collapse also shows that these two vastly different corporate cultures aren’t ready to be combined.

“The collapse of this partnership means that the concept of convergence is finally dead — invitations are going out for the funeral. It makes no sense to try to blend such different businesses as the telcos and cable companies. They work on completely divergent business models,” said Mark Stahlman, president, New Media Associates.

Cox and Southwestern are “using government regulation as a scapegoat,” said Bill Bluestein, research director, Forrester Research. The reason for the failure, he added, is that the two companies finally realized “that the megamergers were pouring large chunks of money into iffy propositions. When you look under the covers at the slowed-down state of the technology and at the pressing regulatory issues, you have to realize you’re spending billions for a technology that won’t happen until 1999 or 2000, or later.”

Also, when QVC lost its bid for Paramount (which Cox and Southwestern Bell backed), “some of the air went out of the partnership,” Bluestein said.

Cox’s Robbins said he did not think there would be any telco-cable mergers in the near future.

“I think there has to be a change in the regulatory climate for anything else to happen. I don’t want to leave anybody with hope that we can learn to live with this. There has to be a change in the environment for deals like this to get done,” Robbins said.

Bob Thomson, TCI’s senior vice president, policy and planning, seconded Robbins’ opinions.

“The FCC’s second bite of the apple was not anticipated when these deals were made. Given the economic model that telcos operate under — big dividends and big reported profits — it is apparent that the FCC’s regulations are well beyond telco expectations,” Thomson said.

The TCI exec added that the overall value of cable companies should not be viewed with skepticism. “We have confidence that the larger companies can work our way through these regulations and survive and even prosper. But there can be no question that these regulations complicate mergers.”

The regs will also complicate development of the information superhighway. TCI has said it will cut $ 500 million in capital expenditures in response to the new regulations.

This collapse, along with the Bell Atlantic-TCI collapse, “will slow down rebuilds of cable systems. There’ll be fewer telco mergers with cable companies in the future, and the ones that get done will be far more rational,” said John Waller, president, Waller Capital.

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