- The Washington Times - Tuesday, June 6, 2000

Telecommunications giant AT&T; Corp. most likely will sell a major joint venture with Time Warner Inc. to satisfy federal regulators who approved its merger with MediaOne, analysts predicted yesterday.

The Federal Communications Commission on Monday gave the green light to the merger but stipulated that AT&T; would have to take one of three steps within one year to ensure that it does not run afoul of rules designed to curb concentration in the telecommunications industry.

The merger, which will create the nation's largest cable television provider, gives AT&T; control of or access to systems that deliver services to 33.2 million customers nationwide. The move positions AT&T; to compete in the fast-moving business of providing consumers with complete packages of voice, video and data services.

The FCC gave AT&T; the option of shearing off systems comprising 9.7 million customers, which analysts described as a "non-starter," because it would reduce the number of cable subscribers AT&T; reaches. The company bought MediaOne for the purpose of adding customers who could purchase a broad range of services.

"That's more subscribers than they bought with MediaOne," said Richard Klugman of Donaldson, Lufkin & Jenrette.

A second option would be to spin off Liberty Media, a television-programming division that AT&T; acquired when it bought Tele-Communications Inc. in March 1999. But AT&T; General Counsel James Cicconi strongly hinted on Monday that AT&T; has little interest in this option, though he did not rule it out.

Cable television pioneer John Malone, who steered TCI toward AT&T; last year, is Liberty Media's and AT&T;'s largest shareholder and a member of the AT&T; board.

"We have never had any intention … nor do we currently have any intention, of spinning off Liberty," Mr. Cicconi said.

Analysts said the most likely strategy would be for AT&T; to sell the 25.5 percent stake MediaOne owned in Time Warner Entertainment, a cable television joint venture with another giant, Time Warner. Participation in the venture gives AT&T; little it could not find elsewhere, according to Steve Kamman of CIBC World Markets.

"They've wanted to sell Time Warner Entertainment, and with only a quarter stake, losing it is not a big deal," Mr. Kamman said.

The FCC concluded that the MediaOne stake in Time Warner Entertainment that AT&T; owns constitutes an overly cozy relationship between it and Time Warner. AT&T;'s Liberty Media also provides content to the joint venture, further tightening the relationship between AT&T; and Time Warner.

Separate from the merger issues, AT&T; is facing a complex negotiation with Time Warner over the rights to sell telephone services to Time Warner's cable customers. Time Warner wants the reverse, and the talks also involve a host of other companies with similar interests as the two giants.

Selling MediaOne's stake in Time Warner Entertainment would not hinder the negotiation over access to Time Warner customers, Mr. Cicconi said, and analysts added that this sale could be incorporated into a broader deal.

If those negotiations failed, AT&T; would retain the option of selling Liberty Media to comply with the FCC rule. Because Liberty provides content, and not services, it would not harm AT&T;'s broader strategy, according to Anna-Maria Kovacs of Janney Montgomery Scott LLC.

"AT&T;'s primary interest in life is not content," Ms. Kovacs said.

But the sale of Liberty comes with its own complications. AT&T; acquired Liberty during its purchase of TCI slightly more than a year ago, and the Internal Revenue Service could treat the sale of Liberty as a liquidation of assets from that merger. Such sales carry a hefty tax burden, though the IRS has been known to make exceptions, Mr. Klugman said.

"The most appealing thing would be to get tax relief from the IRS, but that's a big question mark," Mr. Klugman said.

AT&T;'s stock rose $1 yesterday to $39 per share on the New York Stock Exchange. MediaOne's shares rose 64 cents to $69.33.

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