TCI merger signals telecoms revolution: US telephone giant's dollars 60bn link-up with cable group to provide multiple services faces regulatory hurdles

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The Independent Online
THE STRUGGLE between US telephone and cable television companies for control of the country's telecommunications superhighway took an unexpected turn yesterday, with the announcement that America's largest cable group, Tele-Communications Inc, will be acquired by Bell Atlantic, one of the utilities.

The merger - the largest ever, by some accounting methods - will create a communications and media giant with dollars 60bn in assets, and enough technology and financial muscle to radically reshape America's telecommunications industries.

Unlike recent alliances and cross- investments involving other 'Baby Bells' like US West and Nynex, and the cable companies Time Warner and Viacom respectively, yesterday's deal would entail the complete absorption of TCI and its programming affiliate, Liberty Media, into a vastly larger Bell Atlantic.

But the deal, which would involve a debt- and tax-free exchange of some dollars 12bn worth of shares and the transfer of TCI's dollars 10bn debt, faces huge regulatory hurdles and almost certain political resistance from members of the US Congress.

To overcome laws barring America's seven regional phone companies from owning cable services in their home territory, the new Bell Atlantic has promised to divest itself of some dollars 4bn worth of TCI cable franchises in the mid-Atlantic states where it monopolises local phone service. But outside that area - which runs from New Jersey to Virginia and includes Washington DC - the new company would offer telephony, television new interactive information and shopping services to subscribers over a single 'broadband' network.

But Bell Atlantic will still have to overcome a ban on telephone companies controlling programming carried on their networks, and will doubtless encounter charges that the merger is anti-competitive. Bell Atlantic recently won a court ruling in Virginia allowing it to offer video service over its local telephone lines, but analysts say the deal will become more controversial still if QVC, a home shopping network backed by TCI, succeeds in winning its dollars 9.5bn bid to take over Paramount Communications.

Initial speculation about the merger yesterday suggested that the Paramount bid was central to TCI's decision to agree to the Bell Atlantic takeover. But TCI's chief executive, John Malone, speaking at a news conference yesterday in New York, insisted the two deals were completely unrelated.

Negotiations between the two companies began at Bell Atlantic's urging last spring, long before the rival cable firm Viacom announced its intent to buy Paramount for dollars 7.3bn. Officials of both companies boasted about the high level of secrecy they were able to maintain through the talks; negotiators used code names for each other, with TCI called 'Ireland' out of deference to Mr Malone's Irish extraction, and Bell Atlantic 'Shamrock'.

The newly merged company will be run by Bell Atlantic's chief executive, Raymond Smith, with Mr Malone becoming a vice-chairman responsible for its programming.

Mr Malone's willingness to take a back seat in the merger surprised many analysts, who have regarded him as the pioneer of the cable industry's drive to dominate the new information superhighway. While Mr Malone and other members of TCI management will receive a 10 per cent premium for exchanging their Class B TCI shares for restricted shares in the new Bell Atlantic, his holding in the new company will be less than 4 per cent.

Mr Malone played down the rivalry between the two industries yesterday, arguing that only a marriage of cable's programming skills and the utilities' switching abilities could deliver the product consumers are seeking.

In an interview, TCI's chief operating officer, Brendan Clouston, said the cable company had shown itself able to raise the money required to build a national fibre-optic network on its own. 'I don't think this deal was predicated on financial leverage or strength,' he said. 'It is more a question of a shared vision about the future of full-service telecommunications.'

The final shape of the new company, and the final cost of the merger, will depend largely on the waivers it can obtain from US communications regulators, and the amount of time it will take to complete the merger, Mr Clouston said.

Mr Smith said he was confident that the barriers dividing America's various communications businesses would be eliminated - 'sooner rather than later' - encouraging competition by replacing 'legal franchises' with 'market franchises'.

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