A Wedding Of `The Capitally Infirm With The Financially Weak'?

Just over a year ago, John C. Malone took the stage at a New York hotel to announce the largest communications deal in American history: the $21.4 billion sale of cable giant Tele-Communications Inc. to Bell Atlantic Corp. On Oct. 25, the president of TCI, having left Bell Atlantic at the altar, was back in New York with another deal: TCI and two other cable companies are teaming up with Sprint Corp. to offer local and long-distance phone service, cable TV, and wireless communications--all in a single package.

But if last year's deal was the corporate equivalent of Jurassic Park, Malone's latest offering is more like a Merchant-Ivory production: a smooth, well-crafted alliance that should ruffle few feathers in Washington. "We're coming in as a new competitor in a monopoly industry," says Malone, referring to the $78 billion local phone industry. "This is the side of angels."

Judging by Wall Street's response to the Sprint alliance, it may prefer the old, more devilish Malone. George Reed-Dellinger, an analyst at NatWest Securities Corp., says the deal--pairing the No.3 long-distance provider with three leading cable operators--is far less potent than Bell Atlantic-TCI. "It's a marriage of the capitally infirm with the financially weak," he declares.

Overly harsh? Maybe. But it underscores how much has changed for Malone since he lobbed his cherry bomb a year ago. TCI, with its onerous debt load, still needs a well-heeled telephone partner to break into the local phone business. But Malone is no longer choosing among multibillion-dollar Baby Bell offers. Cable reregulation has made TCI less valuable, and the Bells seem ready to plunge into video services without cable partners.

UNDER SCRUTINY. AT&T also has avoided TCI, while MCI Communications Corp. has eschewed any partners for now. So Malone and his cable colleagues, Comcast Corp. and Cox Enterprises Inc., ended up with the smallest of the long-distance players: Sprint. The partners are organizing a joint venture to bid for licenses to offer personal communications services (PCS), a form of wireless communications, in addition to other cable and phone services.

If this seems less ambitious than the Bell Atlantic merger, it may be because the businesses that drove the earlier deal--movies on demand and home shopping--are still years away from generating huge profits. Wireless communications has a more immediate payoff. Even so, the Sprint alliance faces its own regulatory hurdles. Only six states allow cable companies to compete in the phone business. "It's hard to call that a level playing field," says Marc B. Nathanson, chairman of Falcon Cable Systems Co., a large operator.

Malone has good reason to tread lightly with government regulators. Two other recent TCI deals are currently under scrutiny by antitrust experts at the Federal Trade Commission: its planned takeover, with Comcast, of home-shopping service QVC Inc. and Malone's Aug. 8 deal to buy Norfolk-based TeleCable Corp. for $1.6 billion.

In the QVC case, TCI already owns a controlling interest in the company's archrival, Home Shopping Network Inc. As part of the takeover of QVC, Malone would increase his stake to 43% from 23%. With such power, the FTC fears that he could swamp fledgling home-shopping ventures. In the TeleCable case, TCI's acquisition would give it a "cluster" of cable systems in markets such as Dallas, Kansas City, and Topeka. FTC officials worry that such concentrations also discourage new competitors.

PROVOCATEUR. The FTC could compel Malone to divest one of his home-shopping stakes. He would be less likely to accept an adverse ruling in the TeleCable case. Telephone companies, he says, have long practiced the same sort of clustering the cable industry now considers cost effective: "To say that cable operators can't align themselves with other cable operators is crazy."

That's the old John Malone, full-time free marketeer and part-time provocateur. Indeed, after praising his Sprint deal as procompetitive, Malone couldn't resist adding: "I like monopolies. The idea that we could put TCI and Bell Atlantic together and preserve a near-monopoly posture was kind of appealing to me." Just one more sign that Malone's latest deal is more an accommodation than a triumph.

Before it's here, it's on the Bloomberg Terminal.