FCC is blamed as Bell Atlantic and Tele-Communications call off merger


In a stunning announcement that upsets expectations for the much-ballyhooed information superhighway, Bell Atlantic Corp. and cable TV giant Tele-Communications Inc. say they have canceled their $33 billion merger agreement.

The companies blame the deal's collapse on the Federal Communications Commission, which this week voted to reduce cable television rates against the protests of the cable TV industry. But the complex agreement had run into problems long before the FCC decision.

"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 acquisition of TCI, the nation's largest cable television company, and Liberty Media, a cable TV programmer controlled by TCI.

Since the announcement over four months ago of the deal -- which would have been the biggest merger in U.S. history -- Bell Atlantic's stock price plunged more than 20 percent. The companies also missed three self-imposed deadlines for reaching a definitive merger agreement, as they struggled to overcome a series of complications.

Those included TCI Chief Executive John C. Malone's growing reservations about the deal, according to well-placed sources. Mr. Malone, one of the communications industry's most aggressive deal makers, is said to have felt increasingly penned in by the Bell Atlantic marriage.

The failed deal may presage problems for other ambitious, technology-driven alliances. The TCI-Bell Atlantic agreement was hailed as a crucial step in making the information superhighway a reality, since the marriage would have allowed people access to hundreds of cable TV channels and new telecommunications services such as instant home shopping and banking. Together, TCI and Bell Atlantic would have reached 40 percent of all households in the United States.

The merger agreement triggered a massive -- among other cable TV operators and regional telephone companies -- historically adversaries -- to join and create joint ventures in expection of what is to become the biggest economic boom since the Industrial Revolution. Cox Enterprises and Southwestern Bell have already entered into a joint venture. Others are under way.

Bell Atlantic is expected to proceed with its interactive TV experiments, even without TCI. The regional telephone company has been a leader among the Baby Bells in pursuing technology opportunities beyond traditional telephone service.

TCI is widely expected to continue its pursuit of other partnerships. Mr. Malone has held discussions with at least three major Hollywood companies -- MCA, Sony Pictures and Fox Inc. He feels that he needs unrestricted access to programming to feed into his cable systems.

The collapse of the Bell Atlantic deal also raises the possibility that Mr. Malone will again team with QVC Network Chairman Barry Diller, who recently lost the takeover battle for Paramount Communications. Mr. Malone was one of Mr. Diller's chief backers before the Bell Atlantic agreement.

Despite all the drama surrounding yesterday's announcement, TCI and Bell Atlantic left open the possibility they will cooperate on joint ventures in the future, including the building of high-tech cable/telephone systems and investments in programming.

Regardless of the future for TCI and Bell Atlantic, the announcement set the stage for a battle royal with Washington. Some observers speculated late yesterday that the decision was a high-stakes gambit by the two companies to embarrass the Clinton administration -- which has been an enthusiastic proponent of a high-tech cable/telephone infrastructure -- and get the FCC to reverse its decision to roll back cable TV rates by 7 percent.

Mr. Malone is notoriously disdainful of politicians and regulators who have tried to rein in the cable industry after years of spiraling rates. TCI vigorously attacked the FCC yesterday, saying it would cut its capital expenditure program by $500 million.

That charge was forcefully rejected by the FCC. Chairman Reed Hundt criticized suggestions that the agency's cable rate vote had undercut the TCI-Bell Atlantic deal. He said the price cut "did not in any way make the future of the cable industry more unsettled."

"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," Mr. Hundt said.

James Quello, an FCC commissioner, rejected the notion outright. "I'm afraid this is too convenient," he said. "They [Bell Atlantic] may be paying too much for it [TCI]."

The TCI-Bell Atlantic's decision to cancel the deal is not supposed to affect a simultaneous agreement that TCI has to reacquire Liberty Media Corp., a company spun off to TCI shareholders three years ago that contains many of TCI's investments in program services such as Black Entertainment TV, Home Shopping Network, and an ambitious new pay-TV movie service called Starz!

Under terms of the original merger agreement, $25 billion had been assigned for TCI and Liberty's cable TV subscribers and $5 billion for programming investments.

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