AT&T Sets Liberty Media Free ... Maybe

Regulatory pressure forces AT&T to shed some of its cable girth resulting in a crash diet for the communications giant. Anyone who has tried the binge and purge method can tell you — it really, really hurts.

by Jim Wagner of internetnews.com [November 16, 2000]

AT&T Corp. board members voted Thursday to spin off subsidiary Liberty Media Group, converting its tracking stock into an independent, publicly-traded business entity.

The move comes just weeks after AT&T announced separate plans to break itself up into three companies.

Tax-free diet
But the Liberty Media spin-off is a tentative play. AT&T officials have left an escape clause wide open in Thursday's announcement, which stated "there can be no guarantee that the spin-off plan will be implemented or that changes in the plan will not be made."

At issue is whether the Internal Revenue Service will require that the company pay any capital gains penalties on the spin off before its two-year probationary period expires. Certain tax-free reorganizations, under IRS code, can be completed only if the owner has held the company for more than two years.

Even though AT&T would be setting Liberty Media free well after the two-year waiting period, the IRS could still determine that AT&T was planning to sell off Liberty all along and AT&T would be assessed the capital gains penalty.

An AT&T spokesperson said if the Liberty holdings are taxed, the deal most likely would fall apart. The board of directors would need to determine whether to continue spin-off plans or look for other options.

Tight fit
The cable arm of the telephone giant, formed through its acquisition of MediaOne and TCI, is under pressure by the Federal Communications Commission to reduce its cable holdings. FCC conditions attached to the deals require that AT&T hold no more than 30 percent of the total U.S. Cable market by May 19, 2001.

Thursday's announcement is the opening salvo in what's certain to be an interesting adjustment period for AT&T, whose financial engineering skills are being put to the test.

In addition to casting-off coax companies, the FCC required that AT&T divest its 25 percent ownership stake in Time Warner Entertainment and terminate its involvement in video programming or divest its interest in other cable systems.

Separately, AT&T has been in talks with Time Warner to sell off its shares in Time Warner Entertainment. Looking for a little leverage at the bargaining table, AT&T has asked federal regulators to require that the stake be shed as a condition of Time Warner's merger with America Online, in order to make Time Warner an eager buyer.

AT&T painted itself into a regulatory corner with its acquisition of MediaOne. When AT&T picked up the firm in June, it became a principal owner in the Road Runner, the joint venture between Time Warner , Microsoft Corp. and Compaq Computer Co.

When AT&T took controlling interest in Excite@Home it forced federal regulators to put the company on a crash diet, ordering it to sever ties with Road Runner by the end of next year.

Exercise moderation
It's crunch time for AT&T — it must find a way to meet cable weight limits imposed by federal regulators and keep stockholders attracted to its slim and trim financial figures. After feasting on coax acquisitions over the past few years AT&T has some trust-busting dues to pay.

Only time will tell if AT&T will master its "no pain, no capital gain" plan for setting Liberty Media free. The table has really turned on AT&T — deals that were once no problem to digest, are currently hard for the telecom giant to swallow.

— End    

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