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Washington, Wall St. happy with TCI deal

WASHINGTON — The buyout of the nation’s largest cable company by the nation’s largest telephone company is getting positive reviews in Washington, where legislators, regulators and even public interest groups say the deal may provide a long-awaited jumpstart to competition in the local telephone market.

FCC chairman William Kennard called the acquisition of Tele-Communications Inc. by AT&T Corp. “imminently thinkable.”

A spokesman for House Telecommunications Subcommittee chairman Billy Tauzin (R-La.) said the merger is a “good deal for consumers,” and even the left-leaning Media Access Project released a statement Wednesday declaring: “This might work. Color us tentatively optimistic.”

Happy in D.C.

The reason Washington likes the deal is the hope that it could single-handedly launch the first real competition in the local telephone market in 100 years.

Regulators and legislators are embarrassed that, two years after the Telecommunications Act passed, telephone rates — and particularly cable subscriber fees — continue to rise.

Both the Baby Bells and cablers pledged to Congress that as soon as the Telecommunications Act became law they would start competing with one another to the benefit of consumers, but those promises were forgotten almost as soon as President Clinton signed the bill.

MCI even smiles

Indeed, even MCI Communications Corp., the Washington-based competitor of AT&T, had a pointed reaction. “That AT&T has to acquire a cable company to enter the local phone market,” an MCI spokesman said, “shows the padlocks the RBOCs (Regional Bell Operating Companies) have in place to keep consumers from enjoying the benefits of competition.”

Because of its size, an AT&T-TCI combine must be approved either by the Justice Dept.’s antitrust division or by the Federal Trade Commission.

The FCC will also look at the deal, although the agency’s ability to block the transaction is tenuous. Technically, FCC approval is limited to a handful of licenses that allow TCI to transmit programming between cable systems via microwave signals.

As always, the FCC also has the obligation to test the deal’s benefits for “the public interest.”

Other approvals

Local authorities will have to approve changes to the TCI franchise, too, although AT&T and TCI tried to minimize this regulatory process by the deal’s structure.

TCI must also get its affiliates to come aboard with AT&T offerings.

Leo Hindery Jr., the TCI president who’s slated to become president of AT&T Consumer, expressed confidence that the enhanced packages put to these affiliates would “compel” approval from virtually everyone.

If FCC officials like Kennard continue to be excited about the “pro-competitive” deal, it is not likely that the agency will be a stumbling block.

However, as noted by Andy Schwartzman, executive director of the Media Access Project: “There is plenty of meat for the FCC to sink its teeth into if it is so disposed.”

TCI chairman and CEO John Malone dismissed such interference at an analysts conference call Wednesday.

“This deal will close,” he asserted. “Why? Because it’s exactly what the federal government had in mind (on passing the Tele-communications Act).”

Duopoly?

Others in the telecom business aren’t as confident, however, in that they see AT&T’s use of TCI assets to offer local-market telephony as well as long-distance services as leading to a duopoly.

Each market will wind up being served by the relevant RBOC and AT&T, a competitor said before adding: “That wasn’t the intent of the legislation.”

The competitor then echoed MCI by citing the price AT&T was willing to pay “to get into local markets.”

Cost of doing business

That price is $48.2 billion, all of which will be paid in AT&T stock. Specifically, AT&T will issue 0.7757 shares of its common stock for each share of TCI Group Series A and 0.8533 shares of AT&T for each share of TCI Group Series B stock.

In dollar terms, AT&T will pay $31.8 billion for TCI’s cable business and assume $11 billion in TCI debt. At the same time, TCI’s investment arm TCI Ventures and Liberty Media will merge and the new company will sell a 3% stake in AT&T it already owns and a 39% stake in At Home to AT&T-TCI for $5.5 billion in cash.

AT&T will then fold TCI’s cable systems into AT&T and issue new stock to Liberty’s existing shareholders, who will retain control of that company, guaranteeing its independence.

Three distinct entities will emerge from the deals:

– AT&T Business Co.: consisting of AT&T’s business communications services and wholesale networking services.

– AT&T Consumer Services Co.: consisting of AT&T’s consumer long-distance, wireless and Internet services units and TCI’s cable, telecommunications and high-speed Internet businesses.

– Liberty Media Group: consisting of TCI’s programming arm and its technology investments unit.

Stock options

AT&T will issue “letter” or “tracking” stocks for both AT&T Consumer and Liberty Media.

The two AT&T-named units are designed to appeal to different investor classes. AT&T Business stock was described as a “dividend-paying, earnings-oriented” investment, while AT&T Consumer promises double-digit earnings growth but with commensurate risk.

AT&T Consumer is the combination’s true hybrid and, for that reason, many observers, Malone included, consider the most interesting. “It’s a supercharged version of what TCI has always been doing for investors,” said TCI’s chairman.

Chris Dixon, a telecom analyst with PaineWebber, called the deal “terrific” for two reasons, both having to do with AT&T Consumer. “It enhances TCI’s competitive position (as a cabler) by giving it AT&T’s brand name and financial strength. And it gives AT&T access to a third of the country for local-market services.”

Instant gratification

The 33 million homes passed by TCI and its affiliates are, in fact, AT&T’s primary motivation.

“Today we are beginning to answer a big part of the question about how we will provide local service to U.S. consumers,” said AT&T CEO C. Michael Armstrong. “AT&T Consumer Services will bring to people’s homes the first fully integrated package of communications, electronic commerce and video entertainment services.”

Both Armstrong and Malone highlighted the cross-selling opportunities permitted by, say, a cable installer’s asking a new customer to consider the installation of local phone service or additionally, of high-speed Internet access.

“Liberty will be able to promote AT&T efficiently on a national basis,” Malone added, referring to the programming arm that he’ll oversee.

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