OFF THE HOOK

FCC Lifts TWE Sale Deadline

By TED HEARN and MIKE FARRELL -- Multichannel News, 3/26/2001

WASHINGTON -Nine months of intense lobbying and legal maneuvering finally paid off for AT&T Corp. when the Federal Communications Commission, feeling the heat from a major court setback, decided to set aside a key deadline aimed at the forced breakup of AT&T's cable empire.

AT&T's best cable-related regulatory news from here in years came March 16, when the FCC, under new Republican chairman Michael Powell, lifted the May 19 deadline requiring AT&T to dump its 25- percent stake in Time Warner Entertainment, an asset worth billions of dollars.

AT&T was required to sell the TWE stake, which includes cable systems and programming assets, under a condition the FCC imposed last June when it approved AT&T's acquisition of MediaOne Group Inc. That deal put AT&T in violation of the FCC's cable-ownership rules.

As calculated by the FCC, AT&T presently has about 40 percent of the domestic pay-TV subscriber base, well over the FCC's 30-percent limit.

The backdrop for the FCC's action was the stunning March 2 ruling by a panel of the U.S. Court of Appeals for the District of Columbia Circuit. In that decision, the court tossed out the 30-percent cap citing the First Amendment and a batch of other rules based on similar and, in some instances, separate grounds.

Leading up to the FCC's decision-adopted by a 3 to 1 vote in which Democratic FCC member Susan Ness broke with fellow Democrat Gloria Tristani-Powell said the court ruling compelled the FCC to review whether the AT&T-MediaOne merger conditions were still valid, because they were based in part on rules that are no longer enforceable.

Officially, Powell and Ness called the FCC's action a suspension and put AT&T on notice that it was not entirely out of the woods. But FCC officials said nothing in their statements with respect to how much time they would need to reappraise the merger conditions.

"Our action should not be read as eliminating the condition, but only as suspending the established benchmarks for compliance pending further consideration," Powell said in a statement.

Ness, in a statement that did not explain her reasoning for voting with Powell and Republican FCC member Harold Furchtgott-Roth, restated her concerns about cable ownership concentration. She also declared that Powell had promised to "act expeditiously" in response to the court decision.

A limited partnership that includes at least 9.7 million cable subscribers, TWE is estimated to be worth between $9 billion and $16 billion. Its other assets include Home Box Office and the Warner Bros. studio. AT&T got the stake when it bought MediaOne.

TWE cable subscribers were attributable to AT&T under FCC rules because AT&T owned cable networks that sold their services to TWE.

Even after pressing to skirt the FCC's merger order for so long, AT&T did not treat the FCC's decision as cause for popping champagne corks.

AT&T general counsel and executive vice president James Cicconi issued a statement that said the FCC had taken a "reasonable, measured step" and that AT&T would continue to work with the FCC "as it continues to deal with the court ruling and its implications."

AT&T's understated response scarcely reflected the resources it had poured into the fight. Although the company declined to challenge the FCC's merger conditions in court, it ran to Capitol Hill to seek legislative relief.

AT&T, though, said it never asked Congress to void the MediaOne merger conditions, only that it order the FCC to conduct a review of its cable-ownership policies-especially in light of horizontal mergers in the local telephone industry that were unconstrained by national ownership limits.

AT&T WORKED HARD

AT&T took several additional steps designed to level its negotiating position with respect to TWE's majority owner, AOL Time Warner Inc.

First, AT&T told the FCC in December that it would divest cable programming assets-principally Liberty Media Group, subject to an Internal Revenue Service ruling allowing the sale to occur tax free-to comply with the 30-percent cap. If the Liberty transaction could not occur tax free, AT&T said it would then move to sell TWE. The FCC rejected that approach, ordering the sale of TWE.

Second, while the America Online Inc.-Time Warner Inc. merger was pending, AT&T urged the FCC to require that AOL Time Warner negotiate with AT&T on the sale of its TWE stake. The FCC declined and stuck to its position that the burden fell on AT&T to divest its TWE stake.

Those setbacks faded quickly during the two-week period this month that began with the court decision and ended with the FCC's response.

Consumer-advocacy groups, which fought for strict merger conditions, complained that the GOP-led FCC had kowtowed to corporate benefactors.

"It smells to high heaven of favoritism for the largest cable monopoly, AT&T, and sends a clear signal that under new leadership, the FCC does not plan to impose mean ownership limits on cable monopolies," said Gene Kimmelman, Washington office co-director of the Consumers Union, who also faulted the FCC for not establishing a new deadline.

In a long and biting dissent, Tristani blasted her FCC colleagues for relying on a "non- final" court decision to vacate merger conditions that were not entirely based on the ownership rules.

She said the FCC's merger order was also grounded in whether the merger would serve the public interest.

The FCC's decision, she said, "smacks of backroom dealmaking" that amounted to private meetings between AT&T lobbyists and FCC officials with no room for input from the public.

"The [FCC] is skating on thin ice and the water beneath it is deep, dark and very cold." Tristani said.

In practical terms, the FCC's order gave AT&T new bargaining clout with AOL Time Warner to the extent that AT&T is still interested in selling the TWE stake.

"My bottom line is: [AT&T] will extract a couple of extra billion dollars out of AOL Time Warner," said George Reed-Dellinger, a telecom analyst with Washington Analysis. "[AT&T has] no management control. All they have is legal fees."

Clearly, suspending the deadline gives AT&T more room to negotiate with AOL Time Warner.

Both companies have been at odds for months. At the heart of the stalemate is the value each company has put on the TWE stake: AT&T thinks it's worth between $15 billion and $16 billion, and AOL Time Warner values the stake at between $9 billion and $10 billion.

AOL Time Warner had the advantage of knowing AT&T was under the gun to finalize a deal. Now the deadline is gone.

Banc of America Securities Corp. analyst Doug Shapiro said AT&T also now has the option of holding on to the TWE stake, although he said AT&T probably would rather deal it away.

"There's nothing forcing them not to" keep the TWE stake, Shapiro said. "The problem is that it's a large stake in a non-cash-flowing asset, and how do you convert it into a cash-flowing asset?"

Shapiro said one way to do that would be a deal in which AOL Time Warner could exchange cable systems and associated debt in return for the TWE stake. AT&T's 33-percent nonvoting interest in Cablevision Systems Corp. also could play into those negotiations, Shapiro said.

While Shapiro said the rationale for such a deal is there, there is no guarantee it would happen.

One thing that AT&T probably won't rush to do is unwind its various interests in other cable operators and joint-venture agreements.

"The smaller things are not significant enough in any degree," Shapiro said. "They're not significant financially, they're not significant in valuation, they're not significant to the degree in which liquidating them would help you pay down debt. It's not like AT&T wants a clean closet because it makes them feel good.

"There are certain assets that they want to sell to pare down their debt load. But I don't think there is a fire sale going on."