Cities' Consultants Raise Transfer Concerns


A heavy debt burden, among other factors, means that AT&T Broadband and Comcast Corp. lack the financial wherewithal to operate after their merger without harming local franchisees, according to a legal consultant to dozens of localities in Minnesota, Tennessee and Wisconsin.

The Minneapolis law firm of Creighton, Bradley and Guzzetta LLC advised its clients — dozens of communities, ranging from small suburbs of St. Paul, Minn., to such major cities as Nashville, Tenn. — to reject franchise transfers to AT&T Comcast Corp., as the post-merger company will be known.

The recommendation, based on an analysis by accountants Ashpaugh & Sculco, notes that the merged company will inherit $32.7 billion of debt, most of which matures in 2006. Factor in $4 billion in planned expenditures and a cash-flow deficit estimated at $3.5 billion through the next four years, and that debt increases to $40 billion by 2006.

To retire some of those obligations, the firm's report said, AT&T Comcast will have to raise rates, cut its service staff, further regionalize operations and trim capital expenditures.

The attorneys also expressed concern about agreements that they believe will require the new entity to contract with AT&T Corp., for certain network-telecommunications services. That could curb the MSO's ability to compete, according to the report.

The transaction would have no benefit to the municipalities, the CPAs concluded. And Crieghton, Bradley went even further, asserting that the merger would actually "harm" the cities.

The synergies that the merged company will rely upon just aren't reasonable, the consultants' report states.


But the law firm's analysis runs counter to the opinions offered by other consultants, as well as Wall Street analysts, according to a Comcast spokeswoman. It also fails to take the merged company's efforts to deleverage some debt into account, and thus is flawed, she said.

For instance, Comcast has already liquidated some AT&T Corp. stock, while Broadband has sold some systems to Bresnan Communications Inc. The companies intend to sell AT&T Corp.'s stake in Time Warner Entertainment, she added.


Although other municipal advisers have echoed some of those concerns, they've concluded that franchisors can't "reasonably deny" transfers to the new entity.

While that sounds positive, a federal lawsuit could complicate the actions that cities across the U.S. will take. Consultants are advising clients that the case, Charter Communications Inc. vs. County of Santa Cruz, entitles cities to go beyond the standard test of serviceability they typically employ.

When considering a transfer request, local regulators have traditionally been limited to examining the legal status, financial statements and technical skills of the new operator. But Santa Cruz
puts that test aside, consultants said.

Cities may now demand data to assess the impact to consumers resulting from a transfer. That could affect both the AT&T-Comcast merger and any transfers that might arise from the turmoil now engulfing Adelphia Communications Corp.

Consultants note that the resignation of Adelphia's founding family from the board of directors constitutes a change of ownership, and at some point, cities may have to rule on a transfer to the MSO's new management.


In 2001, a judge ruled in favor of Charter, asserting that Santa Cruz County "arbitrarily and unreasonably" interfered with the transfer of the local system from Sonic Communications to Charter.

U.S. District Court Judge William Alsup of the Northern District of California faulted Santa Cruz for denying the transfer, after Charter refused to provide information beyond the scope of the Federal Communication's Form 394 transfer documents.

The county wanted the data because it was concerned that the amount Charter paid for the system would cause subscription rates to soar.

Though attorneys for the cable industry said the decision reinforced the limits of the transfer process, city representatives claimed that it only defined the 120-day time line.

"There was one redeeming issue in an otherwise bleak decision," said Brian Grogan of Moss & Barnett, a Minnesota law firm that represents 24 cities in California and the Midwest. "Santa Cruz
is 60 pages of information unfavorable to cities, but it also said Form 394 was not designed to limit the scope of the inquiry, just to set a time frame."


That decision is under appeal. But while the judgment stands, it offers cities justification for asking Broadband and Comcast for additional financial information, municipal advisers said.

The merging companies have provided limited financial projections, according to some communities, and what has been said sometimes appears to be contradictory.

A report by consultant Barry Orton and Municipal Services Associates, prepared for several Chicago suburbs, notes that AT&T Comcast asserts it will enjoy $250 million to $450 million per year in reduced programming costs, as well as a savings of $200 million to $300 million per year in overhead. Cash flow should increase by $1.6 billion a year.

But the company may not be able to make those projections if it can't pass increases through to customers, or if it loses subscribers to increased competition, the report noted.

And AT&T Comcast Corp. will inherit several long-term agreements with vendors — including Starz Encore Group LLC, Gemstar-TV Guide International Inc. and CSG Systems Inc. — which will have a material effect on its ability to trim costs.

If it can't create the needed efficiencies, AT&T Comcast would need to find more financing — and that might not come at the most favorable rates, according to what the two companies told the consultants.

Poor financing rates would cause AT&T Comcast to "abandon expansion plans," according to the report.


Cities are looking at the merger's national implications, as highlighted by the consultants, but transfer decisions will be based on local concerns, officials said.

Most are taking things slowly.

In Chicago, city staffers have yet to make a recommendation on the transfer of Broadband's franchise, even though the Board of Aldermen's finance committee has already held a public hearing on the matter.

Chicago cable administrator Joyce Gallagher said the city has received the information it needs from the companies, but staffers need more time to complete the analysis. Aldermen will not take up the issue until this month, she said.