POSSIBLE AOL-TW BID FOR AT&T BROADBAND RAISES QUESTIONS

Cable industry analysts said they doubt reported AOL-Time Warner (AOL-TW) bid for AT&T Broadband could pass regulatory muster, but one observer said govt. disarray over ownership caps could provide “a window of opportunity” for megadeal. Prospect of such corporate marriage was raised by Liberty Media Chmn. John Malone in discussions with analysts, many of whom said any alliance between AT&T Broadband, largest cable operator in nation with 15.3 million subscribers, and TW Cable, second largest cable operator with 12.8 million, would raise serious regulatory questions, even with courts openly criticizing FCC’s cable cross- ownership cap and new FCC Chmn Powell’s stated reluctance to impose such limits. AOL declined comment. AT&T officials said they were exploring their restructuring options and were in talks with “more than one company” but declined to identify any.

More likely than AOL-TW, analysts said, would be bid by Cox Communications because that company is No. 4 national provider with 6.2 million customers, nowhere near 30% cap. With AT&T board due to meet at end of next week, Chmn. Michael Armstrong is hoping to present as many bids as possible, analysts said. Malone, who resigned from AT&T’s board earlier this year, still is one of company’s biggest shareholders, prompting some analysts to speculate he was trying to raise value of his own holdings by floating idea of potential deal. Liberty has substantial holdings in AOL. Liberty spokeswoman didn’t return phone call seeking comment. Armstrong has been openly courting potential suitors, including Disney and Microsoft, following Comcast’s unsolicited $44.5 billion offer in July, which AT&T rejected as too low. Comcast is No. 3 cable operator with 7.7 million subscribers.

Swirl of talk on Wall St. comes as FCC prepares to begin rulemaking Thurs. on cable ownership cap. Original rules barred single cable operator from serving more than 30% of U.S. subscribers, but U.S. Appeals Court, D.C., in March threw that limit out, saying Commission had pulled number “out of thin air” and cap violated First Amendment. Commission also is looking at horizontal rule barring operators from using more than 40% of their first 75 channels with affiliated programming.

AOL-AT&T deal would “create value” for investors but would be risky, said analyst Scott Cleland of Precursor Group, particularly with AOL-TW still under antitrust scrutiny from FTC over merger. He said Comcast’s bid would have 75% chance of passing govt. regulators, as opposed to 55% for AOL because FTC already was concerned about AOL-TW’s hold on Internet access, Internet transport, interactive TV (iTV). Sanford C. Bernstein & Co. analyst Tom Wolzien, who was among those who heard Malone’s remarks, said he wondered whether Malone wasn’t just trying to “float a trial balloon to get AOL out of it,” meaning out of possible competition for AT&T Broadband.

However, this may be opportune moment for unprecedented media concentration because, with no ownership rule currently in place, govt. would have to justify to courts any decision to deny deal, said William Friedman, senior fellow at Duke Law School and legal adviser to former FCC Comr. Gloria Tristani. Regulators still would raise questions about how much content and pipeline that combined AOL-AT&T cable entity would control and whether either would constitute monopoly -- questions raised in AOL-TW merger, he said. But “right now, you have an environment where there does not appear to be any numerical constraint,” he said: “If I were looking for a window of opportunity, this would be it.” FCC spokeswoman declined to comment.