Southwestern Bell cancels deal with Cox Cable COMMUNICATIONS BREAKDOWN


The much-touted convergence of the telephone and cable television industries turned into mutual repulsion yesterday as a second giant telecommunications partnership announced in 1993 foundered on the economic realities of 1994.

Southwestern Bell Corp., which announced last fall that it would form a $4.9 billion cable TV partnership with Cox Cable Communications, called off the deal yesterday. Following the lead of Bell Atlantic Corp. and Tele-Communications Inc., which scuttled their $30 million merger agreement in February, Southwestern and Cox blamed the Federal Communications Commission.

Jim Kahan, Southwestern Bell's senior vice president for strategic planning and corporate development, said in a prepared statement that the rules issued by the FCC on Feb. 22 to implement the 1992 Cable Reregulation Act would hinder the partnership's ability to meet its financial goals.

"After careful analysis of the FCC's more than 700 pages of detailed rules, we concluded that it's unlikely the cable industry can generate the cash flow we expected," Mr. Kahan added.

James O. Robbins, president of Cox Cable, called Southwestern Bell's action understandable in light of the FCC's rate rollback. With more than 1.7 million customers and 24 systems in 17 states, Cox Cable is one of the largest cable television firms in the United States.

FCC officials weren't meekly accepting the blame, however.

"When a deal falls apart, everyone's looking for someone to blame and we're the convenient whipping boy," said FCC general counsel William Kennard. "That tends to be a smoke screen to hide the underlying difficulties between the parties."

Under the deal announced Dec. 7, San Antonio, Texas-based Southwestern Bell would have committed $1.6 billion to the partnership. Cox Cable, a division of Atlanta-based Cox Enterprises Inc., would have kicked in 21 cable systems.

Coming on the heels of the October announcement that Bell Atlantic would acquire the nation's largest cable TV company, the Southwestern-Cox deal was viewed as part of a mad scramble by the regional Bell companies to pair up with cable firms while attractive partners were still available.

With technology blurring the distinction between phone wires and television cable, cable companies were seen as a source of programming and a vehicle for geographical expansion for the region-bound phone companies. The regional Bells were seen as a ready source of cash and expertise in the complexities of operating a switched telephone network. A flurry of marriages seemed imminent.

But as with the Bell Atlantic-TCI deal, it was one thing to announce an engagement and another thing to agree on the dowry.

The failure of the Southwestern-Cox deal leaves only one of last year's cable-telephone mega-deals standing -- the $1 billion investment by US West Inc. in Time Warner, which was completed in September.

Michael Balhoff, a telecommunications analyst at Legg Mason in Baltimore, said Southwestern Bell was clearly forced to revalue its offer to Cox in view of the FCC's decision and Bell Atlantic's willingness to walk away from the TCI deal.

"It very well could have been that because the higher-profile deal fell through that Southwestern Bell might have felt easier about not completing this particular acquisition," Mr. Balhoff said. Had the deal gone through at its original price, he said, Southwestern Bell would have had a lot to explain to the financial community.

As it turned out, Southwestern Bell's stock received a mild boost yesterday, closing up 87 1/2 cents at $39.50.

For the cable companies, the cooling of the telephone companies' ardor leaves them with the same problem that drove them into merger talks in the first place: high debt at a time when they face enormous capital spending costs to upgrade their networks.

"If I were the cable companies, I might have considered accepting a lower purchase price, but I can understand the psychology of why they did not," Mr. Balhoff said.

While the phone companies have clearly put their convergence with cable on hold, telecommunications industry analysts said the forces driving the industries together remain strong.

"I would not call it the nail in the coffin," said Michael Raimondi, an economist with the Boston-based WEFA Group. "There will be some convergence. It will just take a while longer at the price FCC regulators are allowing the cable TV industry."

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