At&T-Mediaone Focus Shifts To Time Warner - Statistical Data Included

Television Digest with Consumer Electronics, June 12, 2000

Spotlight switched from Washington to upcoming negotiations between AT&T and Time Warner following FCC's June 5 approval of AT&T's $58 billion purchase of MediaOne Group. Industry observers see talks between nation's 2 largest MSOs, involving such thorny issues as local phone service over cable lines, cable carriage of multiple ISPs and ownership of major programming networks, as key to future of both cable giants. Discussions also will have impact on timing of closing of AT&T-MediaOne deal, as well as regulatory scrutiny of pending merger between America Online and Time Warner. "The chessboard is getting more complicated," Broadband Intelligence Pres. Cynthia Brumfield said.

Neither AT&T nor Time Warner had much to say about their forthcoming negotiations, all but required by MediaOne's 25.5% stake in Time Warner Entertainment (TWE), AT&T's 9% existing interest in Time Warner through Liberty Media and Time Warner's current right to veto acquisitions of TWE partner MediaOne. AT&T officials declined comment while Time Warner executives couldn't be reached. But Time Warner spokesman told Wall St. Journal that "we have lots of issues to discuss with AT&T" and talks should begin "imminently."

Industry observers expect negotiations to be particularly intense over next 2 months while Time Warner continues to hold its veto power over MediaOne sale. That right expires Aug. 3, prompting prediction by James Cicconi, AT&T gen. counsel and senior vp for govt. affairs, that MediaOne deal should close no later than Aug. 4. Observers believe companies are likely to discuss sweeping agreement that would put AT&T-branded local phone service on Time Warner's cable lines in return for placing AOL's new high-speed data service on AT&T's cable lines. They also think Time Warner will try to recover MediaOne's stake in TWE while AT&T will attempt to retain it for greater leverage over its rival.

Beyond that, industry experts split over what AT&T will do to satisfy govt. conditions. Some believe AT&T will gladly hand over its minority TWE interest to Time Warner, preferring that option to shedding its Liberty Media and Rainbow Media programming interests or selling off cable systems with 9.7 million subscribers. "Why would they want to sell a whole subscriber when they could sell a 25% interest in a subscriber?" asked analyst Scott Cleland of Legg Mason Precursor Group. Analysts estimate sale of TWE stake could fetch more than $12 billion.

Others think AT&T will move to spin off Liberty and Rainbow despite possible tax bill of $5 billion-$7 billion from disposing of Liberty before March. Sale of Liberty and Rainbow would allow MSO to keep all its cable systems as well as its stake in TWE, boosting its distribution reach. "They did this deal to gain the homes," Brumfield said, "so jettisoning Liberty is really the way to go." In favorable report on AT&T stock prospects, Credit Suisse First Boston agreed, estimating that MSO still might have to pay up to $512 million in extra taxes to divest Liberty even if it avoids larger tax bite.

Saying company was "delighted" by FCC's action, Cicconi said AT&T hasn't decided what course it will take. In general, he said, agency granted both of AT&T's requests -- to have "full range of options" and "necessary time" to implement them. He stressed that AT&T had no intention of selling Liberty and never has, prompting some observers to wonder whether company might argue to IRS that it was being forced to sell Liberty by FCC, allowing it to qualify for govt. waiver from big tax bite. "I'm sure if they have to, they'll try that," said Anna-Maria Kovacs, analyst with Janney Montgomery Scott.

In unanimous vote, FCC approved AT&T's purchase of MediaOne June 5, clearing way for nation's largest long distance provider to add MediaOne's 5 million cable subscribers and become nation's largest MSO as well. As expected, FCC imposed conditions to keep AT&T below Commission's 30% cable ownership limits, requiring MSO to shed either MediaOne's 25.5% stake in TWE, its Liberty and Rainbow programming interests or cable systems with total of 9.7 million subscribers. AT&T has almost one year to carry out divestiture but must make

"irrevocable election" among 3 options within 6 months of merger closing. FCC also imposed interim "programming safeguards" initially proposed by AT&T to maintain programming diversity and competition during divestiture period.

In news conference, FCC Chmn. Kennard said decision "strikes the appropriate balance between promoting competition in local telephone service and protecting competition in cable and high- speed Internet service." He credited companies with making "meaningful commitments and concessions," including AT&T's taking "all necessary steps to comply with our channel occupancy rules" and MediaOne's reducing its stake in Time Warner's local telephony unit. He also noted that AT&T has committed to carrying multiple ISPs on both AT&T and MediaOne cable systems and that Justice Dept. is requiring AT&T to divest MediaOne's direct 25% stake in high-speed cable ISP Road Runner.