Bold move has big benefits -- and risks Merger would make Bell a powerhouse

THE BALTIMORE SUN

NEW YORK -- Bell Atlantic's proposed $30 billion merger with the nation's largest cable company would transform the once-staid telephone company into a communications powerhouse, making it the country's only business able to create, maintain and deliver programming along the information highway.

And if QVC Network Inc.'s hostile takeover of Paramount Communications Inc. is successful, Bell Atlantic would also be part owner of a Hollywood studio -- allowing it to add a major film library and new productions to its arsenal of programming.

Bell Atlantic, parent of Chesapeake & Potomac Telephone Co. of Maryland, announced its takeover plans yesterday, saying it had signed a letter of intent to buy cable giant Tele-Communications Inc. (TCI) and the cable programming company it controls, Liberty Media Corp.

If completed on schedule by the end of next year, the deal would give Bell Atlantic access to a quarter of the cable TV market and a stake in 11 national cable stations, including QVC, Turner Broadcasting and the Discovery Channel.

The purchase would be one of the largest in U.S. corporate history. Depending on how the stock of TCI and Liberty Media is valued, it could eclipse the $31 billion buyout of RJR Nabisco in 1989. It would also dwarf a six-week-old battle for Paramount, pitting Viacom Inc. against QVC in a deal that could reach $10 billion.

"It's a very bold move. They're creating the market and they can set the standard, just like Microsoft set the standard for computer operating systems," said Richard E. Cripps, director of equity marketing at Legg Mason Inc.

But the purchase also carries enormous risks.

Besides burdening Bell Atlantic with $10 billion in TCI debt, it also commits the Baby Bell to a huge untried venture of building a nationwide cable infrastructure and developing its programming. While the company insists that Americans want a limitless choice of programs and new products, analysts worry it would not attract enough customers to be profitable for years.

And in the short run, the deal faces intense regulatory scrutiny because Bell Atlantic would be providing the hardware -- cable lines and interactive switches -- as well as the software -- television programs, movies, games and information. While the Clinton administration is eager to build an information highway, some government officials are concerned that too much power will be concentrated in one company.

These concerns could be further increased if Barry Diller's QVC Network Inc. succeeds in buying Paramount. TCI and Liberty both have stakes in QVC, so Bell Atlantic would become a part owner of the Hollywood film studio.

Bell Atlantic Chief Executive Officer Raymond W. Smith, however, said yesterday that the deal would spur competition because it would not prevent other companies from building their own networks. In addition, Bell Atlantic would not exclude other programmers from using its cable system.

"It's going to make the electronic superhighway that we've been talking about for a while a reality. It will help create an interactive, multi-media marketplace in this country that will change the way we work, play and learn -- and it's going to create jobs," Mr. Smith said at a news conference yesterday in New York.

Mr. Smith said the deal would not affect local phone rates. The purchase would involve a swap of stock that would dilute Bell Atlantic's earnings by 30 percent to 40 percent over the next few years but would not weaken its reserve of cash or lessen the company's cash flow.

While regulators have yet to decide whether to permit the deal, Wall Street gave it largely positive reviews. Bell Atlantic's stock shot up $5.875 a share, to a record $65.875.

The merger is to take place in two phases. The first phase would entail Bell Atlantic buying TCI and Liberty's cable businesses for billion in stock and the assumption of debt. In a second

phase, which is likely to face closer government scrutiny, Bell Atlantic would buy the companies' programming operations for an additional $8 billion to $9 billion.

The new company would have $16.4 billion in annual sales and 94,000 employees. Through Liberty Media, which is controlled by TCI, Bell Atlantic would also own stakes in Turner Broadcasting System, Discovery Channel, Black Entertainment Television, Courtroom TV, QVC Network, Family Channel and American Movie Classics.

Much of this media empire, however, was acquired by TCI chairman John C. Malone, a dominant figure in cable television. Many analysts wondered why Mr. Malone would willingly play second fiddle to Mr. Smith after having struggled so hard to make Denver-based TCI the nation's top cable company.

"I may be old-fashioned, but I have a hard time seeing someone with such an entrepreneurial spirit like John Malone in the environment of a telephone company," said Paul Bortz, a Denver-based communications analyst.

At the news conference yesterday, however, the two men made a great show of friendship and joked about the time they spent together as researchers at Bell Labs from 1963 to 1966. They also made clear that while Mr. Smith, 55, would be boss, Mr. Malone would be in charge of creative operations. "He's going to develop the programming and leave Bell Atlantic with the infrastructure to build," said Liam Burke, an analyst at Ferris, Baker Watts in Baltimore.

Mr. Malone, who is the largest shareholder in TCI and Liberty Media, would become a 4 percent shareholder in Bell Atlantic.

Another bonus for Mr. Malone could prove to be a backup plan in case the merger runs into a regulatory or judicial roadblock. In that event, a provision in the deal calls for a spin off of any parts of the company that do not meet with regulatory approval in a timely fashion.

Bell Atlantic would be obligated to sell off these properties as a newly created, publicly traded company and provide a $1 billion infusion. Bell Atlantic agreed to acquire the company, which would operate the programming properties of TCI's Liberty Media affiliate, if those government constraints were eliminated.

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