Bell Atlantic, TCI cancel merger plans, blame FCC

February 24, 1994|By Michael Dresser | Michael Dresser,Sun Staff Writer

Bell Atlantic Corp. and Tele-Communications Inc., the corporate giants that rocked the world of telecommunications when they announced their intention to merge in October, called off the deal last night and blamed the Federal Communications Commission for poisoning the climate.

"Of course, we are disappointed, but the unsettled regulatory climate made it too difficult for the parties to value the future today," Raymond W. Smith, chief executive of the Philadelphia-based parent of Bell Atlantic-Maryland, said in a statement released last night.

Mr. Smith said the two companies thought talks this week had cleared the final barriers to completing Bell Atlantic's estimated $30 billion acquisition of TCI, the nation's largest cable television company, and Liberty Media, a cable TV programmer controlled by TCI.

But when the FCC voted Tuesday to roll back rates an average of 7 percent for 90 percent of the nation's cable subscribers, cable industry conditions became too uncertain to complete such a large merger, Mr. Smith said.

FCC Chairman Reed E. Hundt fired back almost immediately.

"Tuesday's unanimous FCC decision did not in any way make the future of the cable industry more unsettled," Mr. Hundt said in a statement issued last night. "Our adoption of a comprehensive set of regulations clarified the industry's future by finalizing our cable rate decision and establishing cost-of-service and going-forward rules."

The deal the companies announced Oct. 13 was staggering in its boldness. It would have created a telecommunications giant with an estimated $60 billion in assets and $7.5 billion in annual cash flow. The combined company would have had access to 42 percent of U.S. homes.

The break-off of negotiations jammed the brakes on what had been an accelerating convergence of the cable TV and regional telephone industries. When the deal was announced, it was hailed by many as an important step toward creating a national information infrastructure.

Mark Plakias, managing director of the Strategic Telemedia research firm in New York, said the decision to call off the merger could delay construction of the fiber-optic "highway" that would bring 21st-century telecommunications services into U.S. homes.

"It takes the pressure off the [telephone companies] to find cable partners, and it gives cable companies a way out of having to build the infrastructure needed to deliver these services," he said.

"What Bell Atlantic is saying is that 'I don't want to sacrifice my shareholders for this gamble,' " he added.

Last night, the two companies portrayed the decision to call off the merger as amicable. John C. Malone, president of Denver-based TCI and chairman of Liberty Media, said in the joint statement that the companies are discussing other forms of collaboration, including possible joint ventures to build networks and create programming.

"The chemistry was very good there. There was mutual respect on both sides," said Eric Rabe, a spokesman for Bell Atlantic.

The FCC's decision Tuesday came after heavy pressure from Congress and the public to revise rate-rollback rules it adopted last year to enforce the Cable Act of 1992.

Because of loopholes in those rules, rates actually increased for an estimated one-third of cable subscribers.

The new rules will clearly take a toll on the revenues and earnings of TCI and other cable companies, but Mr. Plakias said the FCC's "entirely predictable" decision to cut rates 7 percent should have come as no surprise to Mr. Smith and Mr. Malone.

"To use this as a rationale for killing the deal suggests there's more than meets the eye here," Mr. Plakias said.

For months, the talks have been complicated by a steep decline in the value of Bell Atlantic stock after the euphoria that followed the merger announcement wore off.

The regional phone company's stock had soared to $67.625 the day the news of the merger came out, but since then the price has steadily eroded, closing yesterday at $52.75 before the breakup was announced.

The slide had caused concern among TCI shareholders, who were to have received Bell Atlantic stock for their shares.

During the last two months, Mr. Smith and Mr. Malone repeatedly missed deadlines for completing the merger as TCI pressed for a better deal for its shareholders.

Mr. Rabe said the break-off had nothing to do with the stock decline. On Monday, he said, "We felt we had an agreement on everything but price."

Ironically, the FCC chairman whose agency the companies blamed for the decision is a close associate of Vice President Al Gore, who had sent signals that the Clinton administration was sympathetic toward the merger.

The vice president, the administration's point man on telecommunications policy, singled out Mr. Smith and Mr. Malone for praise after the two companies announced in January that they planned to connect more than one-quarter of the nation's public elementary and high schools to the "information superhighway" free of charge.

Last night, Mr. Rabe said that that is now unlikely.

"I'm not sure we can do that," he said. "We may be able to do something like that in the places where we're operating."

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