AGREEMENT MERGES NATION'S FIRST, 3RD LARGEST CABLE COMPANIES

Merger deal announced Tues. night by Comcast Corp. and AT&T comes at time when FCC has no ownership cap in place by which to measure if combination of nation’s first and 3rd largest cable is too big. New company, called AT&T Comcast Corp, will have about 22 million subscribers, be major presence in 17 of nation’s 20 largest cities and be competitor in 41 states. AT&T’s decision, which received unanimous approval by its board Tues., came after Comcast significantly upped its original $44 billion price offered, and rejected, over summer. Under terms of agreement, AT&T will spin off its broadband unit and simultaneously merge it with Comcast. New company assumes nearly $20 billion in debt and other liabilities from AT&T and its subsidiaries, as well as $5 billion of AT&T subsidiary securities held by Microsoft Corp. Microsoft agreed to convert that $5 billion into 115 million shares of new company.

AT&T shareholders would receive $13.07 per AT&T share based on Comcast’s closing price Wed., making deal worth $72 billion when taken together with debt assumption and other benefits. AT&T shareholders will own 56% economic stake and about 66% voting interest in new company. Roberts family will control about 33% of new company’s voting interest. That is noteworthy because AT&T board was said to have reservations about allowing Roberts family such large voting stake.

Former FCC Cable Bureau Chief Deborah Lathen said challenge for current Commission would be to evaluate merger in “a regulatory no man’s land” because U.S. Appeals Court, D.C., struck down Commission’s 30% ownership cap in March. Commission is currently weighing Further Notice of Proposed Rulemaking on issue. Combination’s 22 million subscribers top 30% of all U.S. cable subscribers, since figures as of Sept. show that nation has approximately 63.7 million cable subscribers.

“Clearly, there has been every indication given that the caps are not insurmountable,” Lathen said. “The bar has shifted on what’s thinkable and what’s not.” Lathen said current Commission, though dominated by Republican free market thinkers, would give deal “very careful scrutiny,” especially with regard to possible harms to public interest. Analyst Blair Levin, who was chief of staff under former FCC Chmn. Reed. Hundt, said he believes deal will pass muster in end, though merger -- taken together with proposed EchoStar-DirecTV merger -- could prod regulators to take 2nd look at market for purchasing programming. Levin said such large combinations could have significant impact on program buying market, making it more difficult for some programmers to get carriage.

Proposed deal with Comcast does not present nearly as many potential regulatory problems as combination with AOL- Time Warner would have, Levin said. AOL-TW and Cox were Comcast’s competitors in auction, and Microsoft was working behind scenes to scuttle any deal with competitor AOL-TW. Levin said he believes so-called losers in this deal will probably attempt others within next 12 months. “From my understanding, from an FCC regulatory perspective, there is no hurdle (for Comcast) … since we know the 30% number is going up,” he said.

Comcast Pres. Brian Roberts, who will be CEO of new company, said he was especially excited about combined company’s prospects for telephony because AT&T Comcast plant will pass more than 38 million homes and bring AT&T name to its cable telephony service. “The size of our telephony footprint, combines with AT&T’s expertise and leadership in the telephony space, will enable us to accelerate the deployment of telephone services to many new markets,” he said. Combined company, off-the-bat, will have at least 1 million cable telephony customers, 5 million digital video customers and 2.2 million high-speed data customers.

AT&T CEO Michael Armstrong is to be chmn. of new company when merger closes, which is expected at end of 2002. Until then, Armstrong will remain chmn. and CEO of AT&T. New company will be headquartered in Philadelphia, where Comcast is based. Armstrong and Roberts have established transition team to address issues that arise from merger. That team includes recently-named AT&T Broadband CEO William Schleyer, as well as Comcast Pres. Steven Burke, among others.