Collapse On The Info Highwayby and
Optimism. Just a month ago, when more than 2,000 media, cable, and telephone executives gathered at the University of California at Los Angeles for the immodestly labeled "Superhighway Summit," the optimism was as naked and unbridled as it gets. "This is no field of dreams," said John C. Malone, chief executive of cable giant Tele-Communications Inc.
Or is it? Suddenly, everything has turned topsy-turvy. On Feb. 23, TCI and Bell Atlantic Corp. announced they had called off their $21.4 billion merger, potentially, the largest in U.S. corporate history.
After months of tense negotiations, the two companies say they were unable to hammer out a price for TCI. "New uncertainties in the industry made it clear to both of us that it was just impossible to come up with a final, fair value," says James G. Cullen, president of Bell Atlantic.
Chief among those uncertainties is the impact of a second round of cable rate cuts that the Federal Communications Commission passed on Feb. 22. The FCC voted to cut cable rates by 7%, atop a 10% reduction last year. TCI sources say the two cuts could cost it upward of $225 million a year in cash flow. That immediately cast doubt on the value Bell Atlantic originally placed on TCI--11.75 times projected cash flow--throwing the talks into chaos.
Just as the Bell Atlantic and TCI announcement galvanized Wall Street to the possibilities of the Information Superhighway last October, its collapse may chill investors on an infant industry that has generated huge excitement but has so far been more hype than substance. "It certainly raises questions about all the other deals," says John Tinker, a media analyst at Furman Selz. Observes Forrest Miller, vice-president for corporate development at Pacific Telesis Corp.: "The level of uncertainty got lifted a notch."
Well before Bell Atlantic's stunning announcement, investors were cooling on two other big deals involving cable-TV, telephone, and entertainment companies: Viacom Inc.'s acquisition of Blockbuster Entertainment Corp. and American Telephone & Telegraph Co.'s $12.6 billion purchase of McCaw Cellular Communications Inc. (table). Their fears have been stoked by everything from delays in interactive technology to increasingly prickly federal regulators.
Bell Atlantic and TCI are blaming their failure on the new government regulations. Despite rumors that TCI President Malone was simply holding out for a better deal, Cullen insists the talks broke down only because the companies couldn't project how the rate cuts would affect TCI's cash flow. "We were in agreement on virtually every single issue, except the final price," he says. Bell Atlantic Chairman Raymond W. Smith and Malone pulled the plug after six hours of talks in New York City on Feb. 22 and Feb. 23 that Cullen describes as "very positive" though "frustrating."
Behind the scenes, though, media executives say Malone and Smith were not seeing eye to eye on several issues prior to the FCC's announcement. According to one cable executive, Smith was far leerier than Malone about Bell Atlantic's ability to pay down the $9.6 billion in debt from TCI and its sister company, Liberty Media Corp., that Bell Atlantic would assume as part of the deal. Malone, this executive says, was more bullish than Smith about how much incremental revenue would come from the interactive-TV services that the merger was designed to promote.
Now, Bell Atlantic and TCI executives say it is unlikely they will return to the bargaining table. Instead, Cullen says Bell Atlantic will focus on upgrading its networks to handle video services. He says Bell may still team up with TCI to develop interactive services outside its home base. For its part, TCI says it's not interested in linking up with another Baby Bell. It will slash 1994 capital spending by $500 million, or 50%, because of the FCC rate rollback.
Such retrenchment doesn't bode well for Viacom, which hopes to merge with Blockbuster in a stock deal similar to the Bell Atlantic-TCI linkup. "We're reasonably confident that the merger is going to go through," says Viacom Chairman Sumner M. Redstone. He has a good reason to be cautious.
Blockbuster shareholders, who are being paid for their company in Viacom shares, are threatening to vote against the deal following a 39.9% drop in the price of the stock. And Blockbuster Chairman H. Wayne Huizenga hints that the terms may have to be revised, perhaps by issuing more Viacom stock. Wall Street has pummeled Viacom because of fears it is shouldering too much debt from its $10 billion acquisition of Paramount Communications Inc.
Viacom can argue that the merger would make it less dependent on cable revenue. But it must also battle a perception that the technology for interactive TV is further away than many first assumed. Last October, TCI fueled expectations by ordering 1 million state-of-the-art cable converter boxes from General Instrument Corp. Three months later, Malone pushed back the order by up to a year. TCI attributes the delay to difficulty in setting industry standards for such equipment.
Time Warner Inc. still hopes to offer similar interactive services to 4,000 customers in its Orlando cable system by the end of 1994. But outside experts say the project has also been hampered by an overly expensive converter box. Lynn Yaeger, a senior vice-president of Time Warner Cable, won't comment on specifics. But she acknowledges the project hasn't been trouble-free: "Anytime you use new technology, there are hurdles to jump."
Even after the technology wrinkles are ironed out, companies will have to contend with a Clinton Administration that--well before the FCC decision--had not lived up to its promise as the facilitator of America's Superhighway future. Take AT&T, which has been struggling for six months to complete its proposed $12.6 billion acquisition of McCaw. The U.S. Justice Dept. has asked a federal court to deny a legal waiver that would expedite the deal. Without the waiver, McCaw would have to sever ties with companies in lucrative cellular-phone markets that compete with AT&T.
SLOWER PACE. AT&T stock has dropped 14.2% since last August, reducing the value of the deal to McCaw by $1.8 billion. Analysts say Ma Bell has been hurt by fears of stock dilution and by Congress' considering rules that would allow Baby Bells into long distance.
Prior to the TCI bombshell, some analysts were saying that the drop in stock prices simply reflected a much-needed correction after months of overheated speculation about the Information Superhighway. "The fact is," says Robertson, Stephens & Co. analyst Keith E. Benjamin, "that many of these companies were bid up to impossible levels in the first place."
Now, though, the industry has to consider a darker possibility: that the unraveling of the Bell Atlantic-TCI deal will dramatically slow the pace of Superhighway construction. If so, Wall Street's recent skittishness may soon seem like a happy memory.