Forum: AT&T/TCI: Business as Usual for Local Approvals

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Since Tele-Communications Inc. announced its plan to mergeinto AT&T Corp., a number of consultants and attorneys who are eager to representmunicipalities have made aggressive claims about the merger process at the local level.

A recent article appearing in this space (MultichannelNews Forum, Sept. 28, 1998), however, set a new standard for frivolous legal theoriesby claiming that "principles of federal law" require local approval of theTCI/AT&T merger in every community where TCI holds a franchise.

There is no federal obligation for a cable operator toobtain the consent of its local government regulators: The obligation arises solely fromthe terms of the cable operator's franchise agreement and applicable state or locallaws.

TCI has analyzed regulatory approvals for this proposedmerger in exactly the same way that cable operators have treated mergers for as long asthe industry has existed. Specifically, TCI has explained to its local franchiseauthorities that this transaction will not involve any transfer of assets (including thefranchise), but instead that it will result in a change in control of TCI, which willbecome a subsidiary of AT&T.

Where the terms of TCI's local franchises requirelocal consent to such a change of control, TCI has explained that it will, of course,abide by those agreements and seek consent. But where the local franchise agreements donot require local consent to a change in control, TCI does not intend to seek consent,although it will readily share the same information provided to those communities whereconsent is sought.

AT&T has publicly endorsed this position, as those ofus who attended AT&T president John Zeglis' September speech to the NationalAssociation of Telecommunications Officers and Administrators would attest. Zeglis'speech was well-received, and Multichannel News accurately reported (in its Sept.21, 1998, issue) that "support for AT&T's acquisition of TCI appeared to berunning high at the NATOA conference."

This enthusiasm should come as no surprise to anyone. Theaddition of AT&T's financial strength and reputation for technological innovationcan mean only great things for TCI's cable communities.

There is no imaginable drawback. TCI and AT&T do notcompete in any line of business. For AT&T to compete with local phone companies, itneeds local networks, and it finds them in TCI. According to the CEOs of both companies,AT&T's merger with TCI is designed to jump-start the type of facilities-basedcompetition in local telephony that Congress had in mind when it passed theTelecommunications Act of 1996. Who would deny those benefits to consumers?

TCI's reading of franchises is well-known to veteransof cable-franchising law. In cable deals over the years, merging companies have followedthe same approach, seeking local government consent only where the franchise agreementspecifically required consent for the type of merger proposed.

In those mergers, no regulator challenged the validity ofthe legal distinction between a sale of assets and a change in corporate control. TCIshould not be expected to reinvent the ground rules and legal standards just because itssuitor is AT&T.

Franchise agreements are contracts that reflect manyintentional decisions of local governments. As hard as it may be for some municipalconsultants to accept, many franchises intentionally omit reference to a host of specificissues, including franchise transfers or corporate reorganizations. Some elected officialsbelieve that contracts are assignable and, so long as the agreement is intact andenforceable, it matters not which of many highly qualified companies holds it.

To the chagrin of some, such officials have little need tohire consultants to assist in reviewing cable transactions.

There has never been any federal requirement for a cableoperator to obtain the consent of the local government for the sale of a cable franchise,or for a change in control of the cable operator.

True, as the article on the TCI/AT&T merger points out,there is a federal law that explicitly requires the holder of a broadcast license toobtain the Federal Communications Commission's consent prior to a corporate change ofcontrol.

However, this broadcast law has no conceivable applicationto local regulation of transactions that involve the sale of cable-television franchisesor the change of control of cable operators.

As most municipalities know, the only provision in theCommunications Act that speaks to the "sale or transfer" of a cable franchisesimply requires municipal action within 120 days of a cable operator's request forconsent to a proposed transaction.

As the FCC has explained, this provision was designed"to ensure that the local franchise-approval process not unduly delay theconsummation of transactions." It certainly was not designed to create a potentialroadblock to any transaction in each community served by a merging cable operator.

More to the point, Congress decreed in the statute thatthis cable-transfer or assignment provision applies only "if the franchise requiresfranchising-authority approval of a sale or transfer." The law does not impose a newfederal obligation for a cable operator to obtain the consent of every community served bya system involved in a transaction, nor does it create a mandatory regulatory obligationon local elected officials to review all cable transactions.

As a policy matter, if local regulators want consumers toenjoy the benefits of competition in video, voice, data and Internet services, it servesno purpose to use their cable-regulatory role to create roadblocks to industrytransactions. Regional Bell operating companies such as Bell Atlantic Corp., Nynex Corp.,GTE Corp., Southwestern Bell and Pacific Telesis Group are merging their vast resourcesand omnipresent networks.

The best chance that cable operators have to compete inmarkets served by these giant telephone incumbents -- and to provide consumers with achoice for high-speed Internet, voice and other services -- is through regionalconsolidation and strategic alliances.

MSOs and new players from outside of the cable industryhave seen the wisdom of strategic combinations and investments. Witness MicrosoftCorp.'s $1 billion investment in Comcast Corp.; Paul Allen's pending $7 billionacquisition of Charter Communications Inc. and Marcus Cable; and AT&T's $48billion merger with TCI.

If consumers are to benefit from the new technologies andservices that these alliances unleash, local governments should view with healthyskepticism consultants bearing unfounded legal theories and prescriptions for delay.

The TCI/AT&T merger may be unique in the world oftelecommunications for its scope and potential, but it is routine in terms of thetreatment of local consents. There is no reason to change the way that cable deals havebeen done for decades, and there is every reason for the merger to go forward using thesame standards that have always governed.

Bob Scott is a partner with Cole, Raywid & Braverman, aWashington, D.C.-based law firm that represents many cable operators.

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