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July 9, 2001 [WSJ.com]

Comcast-AT&T Deal Likely Wouldn't Face Regulatory Hurdles



NEW YORK -- Comcast Corp.'s (CMCSA) bid to become the nation's largest cable company, should its unsolicited offer to buy AT&T Corp.'s (T) cable operations succeed, is unlikely to face serious antitrust hurdles.

And Comcast has AT&T to thank.

It was AT&T's legal challenge that swept away the federal restrictions on cable companies' market share that might have curtailed Comcast's expansionary ways.

The Federal Communications Commission had imposed a rule capping market share at 30% of the nation's cable and satellite-television subscribers. But after AT&T merged with MediaOne Group and exceeded the limit - precipitating an FCC effort to force the company to sell some assets - it fought the rule in court and won in March.

The ruling pushed the FCC to grant AT&T a reprieve from a deadline to sell assets while the agency reviews the rule. What alternate limits might be imposed are unknown, creating "a major source of uncertainty for any AT&T-Comcast deal," but they are likely to be more liberal, said Pantelis Michalopoulos, partner and antitrust expert at law firm Steptoe & Johnson.

"If there is no bright-line test, it will be difficult for this Administration and the FCC to stop this deal," he said. Because the Bush Administration is philosophically committed to limited use of regulation, it is unlikely to use "public interest standards" or antitrust laws to make a case against the deal, Michalopoulos said.

If Comcast, Philadelphia, acquires AT&T's cable assets it will gain about 14.5 million subscribers, creating the nation's largest cable company by far with more than 22 million subscribers, for a cap-busting one-third market share.

Comcast offered on Sunday to pay $44.5 billion and assume $13.5 billion in debt, and has indicated it's prepared to sweeten its bid. AT&T has said it has no intention of selling its cable assets, though it is evaluating the offer.

AT&T spent more than $100 billion in cash and stock in 1999 to buy MediaOne and, earlier, Tele-Communications Inc. Comcast is offering to buy the entire empire for about half of what AT&T paid to build it.

AT&T said it plans to move ahead with its restructuring plans announced in October that would create four new publicly held companies under the AT&T brand.

The first of those companies was born Monday, when AT&T completed the spinoff of AT&T Wireless Group Corp. (AWE). The cable operations that Comcast seeks to buy constitute what would be AT&T Broadband, a cable TV and broadband service provider. The other two companies to be created are AT&T Business, an enterprise communications and networking company, and AT&T Consumer, a consumer communications and marketing company.

Comcast wants to do the deal now, as opposed to after AT&T Broadband goes public, while it can be done tax free. It has offered to assume billions more in debt and issue additional equity to buy AT&T's interests in Time Warner Entertainment, Cablevision Corp. and Rainbow Media. AT&T has been trying to sell these stakes to reduce its debt load.

The Time Warner Entertainment stake, ironically, is one of the assets that the FCC had sought to force AT&T to sell in order to drop below the 30% market-share cap.

AT&T may be splitting to pieces and looking to shed cable assets, but other cable companies are building mass.

"It's a wake-up call. Deals such as AT&T-Comcast are a reality, and big cable will become even bigger," Steptoe & Johnson's Michalopoulos said. "Even if this doesn't happen... I think we will see more consolidation among cable operators."

Comcast has been a hungry predator in the last 18 months, completing five major acquisitions that have doubled its size. The company reported year 2000 net income of $2.02 billion on revenue of $8.2 billion, compared with net income of $1.1 billion on revenue of $6.5 billion in 1999.

"There are serious concerns with the creation of such a cable colossus, but they're the kind of concerns this administration will not deal with," Michalopoulos said. Foremost among them would be Comcast's tremendous buying power. Its size could allow it to squeeze independent content providers and obtain special treatment from affiliated programmers.

Michalopoulos said Comcast has already used a legal loophole to gain exclusive rights to Philadelphia sports content. The company could extend the use of such tactics into other programming areas.

Nicholas Economides, professor at New York University's Stern School of Business, agreed Comcast's buying program could come under scrutiny. He said cable operators are typically monopolies in particular regions, so mergers don't necessarily create antitrust problems related to geography.

It's possible that buying rules could be imposed as part of the FCC approval process. "But there is a bias in this administration against imposing conditions, philosophically that is," Michalopoulos said.

The overall goal of the FCC's ownership rules, established under the authority of the 1992 Cable Act, was to preserve competition and diversity of programming choices for consumers. The court upheld that overall goal in an earlier decision.

   -By Riva Richmond, Dow Jones Newswires, 201-938-5670

Briefing Book for: AOL | AWE | CMCSA | CMCSK | T

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