Megamergers keep rolling out of Washington signed, sealed and approved by the FCC. The commission Monday conditionally greenlit AT&T’s $58 billion purchase of MediaOne Group as long as the behemoth sheds some cable systems or some content, and properly insulates one from the other.
The ruling comes soon after Time Warner showcased the ugly side of cable concentration when it temporarily yanked the ABC network off the air in a number of its cable markets during a monetary spat with ABC’s parent Walt Disney.
AT&T execs declined to specify what course they plan to take among those offered by the FCC, including AT&T selling its stake in Time Warner Entertainment, divesting programming assets like Liberty Media, or unloading cable systems. It’s got a year to complete one of the three.
The Department of Justice gave its blessing to the AT&T/MediaOne combination several weeks ago, affirming the long-distance giant’s dramatic metamorphosis into the nation’s largest cable company, one with big plans for local telephone and Internet access as well.
The DOJ asked that the new entity shed its stake in Road Runner, a high-speed Internet access service.
“This merger will mean a real choice and lower prices in local phone service, faster Internet access and better cable TV,” crowed AT&T chairman-CEO C. Michael Armstrong, the architect of AT&T’s transformation. “For consumers, that’s a home run in any ballpark.”
Consumer groups queasy
Public interest groups aren’t so sure, and the FCC has some reservations as well, although it applauds the deal’s potential for creating competition to local telephone providers.
The commission insisted that AT&T shed assets to comply with the current 30% national ownership limits on cable TV subscribers. Regulators reckon that AT&T/MediaOne’s fully-owned and attributed subs total about 34 million, or just over 40% of U.S. cable subs. AT&T disputed that figure as too high during a conference call Monday afternoon.
“My approval of the merger is a conditional approval,” FCC chairman William Kennard cautioned reporters at a news conference in Washington, D.C. “This decision strikes the appropriate balance between promoting competition,” on the one hand, and protecting it on the other.
AT&T general counsel Jim Cicconi said during the company’s call, which shifted between accommodating and defiant in tone, that some of the so-called attributed subscribers the FCC lumps into AT&T’s total number “wouldn’t stand up in court.”
Those are cable systems in which AT&T may only have a minority interest. Yet, he said, the company can and will comply with federal ownership limits, likely by following one of the three scenarios outlined by the FCC.
Those would be:
- Unloading MediaOne’s 25% interest in Time Warner Entertainment (TWE), a joint venture with Time Warner Inc. that includes both cable systems and programming assets.
Wall Streeters note that this option isn’t particularly attractive, since AT&T has a number of complex agreements in the works with Time Warner, including a telephony deal, and doesn’t want to weaken its bargaining position by being forced into selling its piece of TWE.
- Shedding programming interests that sell to Time Warner’s cable systems. That would include Liberty Media as well as AT&T’s stake in Cablevision’s Rainbow Media.
A sale of Liberty, which AT&T acquired when it purchased John Malone’s Tele-Communications Inc. two years ago, could carry an immense tax burden, some Wall Streeters said, noting that a spinoff might be more fiscally feasible.
The Internal Revenue Service frowns on companies acquiring assets and then turning around and selling them shortly after, and imposes heavy tax penalties in such cases.
Cicconi said AT&T has “no intention” of spinning Liberty off and insisted that IRS policies are open to interpretation and depend in large part on the intentions of the parties at the time of the original transaction — meaning, a company could get some leeway if it bought intending in good faith to hold, not sell, the asset.
Wall Streeters see a separation from Liberty, which owns a range of programming assets, as the likeliest course.
“It’s a legal fiction that AT&T controls Liberty anyway. Everyone knows John Malone controls it, so it’s pretty easy to spin it off,” said one fund manager.
- Selling outright cable systems with just shy of 10 million subscribers. Some observers think that’s unlikely, since AT&T’s primary goal has been to amass as many subs under one tent as possible to have maximum impact in rolling out telephony and broadband.
AT&T has six months to decide on its course of action and one year to implement it, the FCC said. AT&T had asked for 18 months to comply with the federal ownership cap back in February.
If AT&T does not meet the deadline, the agency said, it “must designate the assets that must be placed in an irrevocable trust for the purpose of sale to complete the elected divestiture option.”
The DOJ and the FCC have been working overtime lately. They recently approved Viacom’s massive purchase of CBS Corp. and are now chewing over the proposed merger of America Online and Time Warner, which those partners say they expect to close by year end.