Brian
T. Grogan
(612) 347-0340
E-Mail: GroganB@moss-barnett.com
www.municipalcommunicationslaw.com
To: Moss & Barnett Clients and Interested Parties
From: Brian T. Grogan, Esq.
Date: February 13, 2002
1.
TRANSFERS OF
CONTROL/OWNERSHIP TO DOMINATE 2002
In the next several weeks over 5,000 franchising
authorities across the country will be receiving Federal Communications
Commission (“FCC”) Form 394 requesting transfer, or a change in the control, of
the cable television operator serving their community. FCC Form 394 will include numerous
attachments that will provide information regarding the proposed transferee’s
legal, technical and financial qualifications.
The transaction between AT&T Broadband and Comcast will
likely require approval from most AT&T and Comcast franchising
authorities. Other system swaps, trades
and sales are also due to seek regulatory approval. The rules governing a transfer review are
found in federal law at 47 U.S.C. § 537 and FCC regulations at 47 C.F.R.
§ 76.502. Franchising authorities
must also carefully consider applicable state law and relevant provisions of
the local franchise. Particular
attention should be paid to the local franchise as it may contain additional
transfer obligations and deadlines and may trigger rights for the franchising
authority in the event of a change of ownership.
Under federal law, a franchising authority has 120 days
from the date of submission of the completed FCC Form 394 to complete its
review. The franchising authority must
notify the cable operator within thirty (30) days of the filing of FCC Form 394
if it questions the accuracy of the Form 394 information. If the franchising authority fails to act
upon such transfer request within 120 days, such request is deemed granted
unless the franchising authority and the requesting party otherwise agree to an
extension of time. A recent case, Charter Communications, Inc. v. County of
Santa Cruz, 133 F. Supp. 2d 1184 (N.D. Cal. 2001) provides an excellent
review of the applicable federal timeframes in a transfer proceeding. (See www.municipalcommunicationslaw.com
for additional information regarding this decision).
Legal
Qualifications
When reviewing a proposed transfer of control, franchising
authorities should document the ownership structure of the proposed
transferee. Is the transferee a
corporation or partnership? Who are the
principals? In addition, inquiries
should be made into the following items:
1)
Current cable franchises.
2)
Criminal or civil proceedings involving the transferee.
3)
Revocations, suspensions, non-renewals of any business license of the
transferee.
4)
Other cable systems sold by the transferee or any pending cable
franchise applications.
5)
Cable franchise violations.
Technical
Qualifications
With respect to the technical qualifications of the
transferee, it is essential to identify any changes it may seek in the
operation of the cable system or the franchise document. Inquiries should be made into the following
items:
1)
Changes to the system. Is the transferee
proposing, or will the transferee undertake, any changes in the system
including, but not limited to, programming, PEG access support, equipment,
institutional network services, customer service, reporting, etc.?
2)
Changes in the operation of the system.
Is the transferee proposing or will the transferee undertake any changes
in the operation of the system, including, but not limited to, billing
practices, personnel, technical oversight, call center consolidation, etc.?
3)
Changes to the franchise. Is the transferee
requesting or will the transferee request any changes to the franchise
document? In other words, will the
transferee be seeking relief from any obligations which may require capital
contributions or other burdensome requirements contained within the
franchise. Is the proposed transferee
willing to accept all of the franchise obligations or will it seek to challenge
the enforceability of certain obligations?
Financial
Qualifications
A review of the financial qualifications of the proposed
transferee is a critical element in the transfer review process. The financial capability of the transferee
will impact directly on the quality of service and the ability of the transferee
to live up to its commitments under the franchise. The franchising authority should be provided
with the documentation necessary to enable it to evaluate the transferee’s
financial qualifications. At a minimum,
the franchising authority should receive the following information:
1)
Copy of a letter of intent and/or purchase agreement. These documents will assist the franchising
authority in identifying the transferee and the content of the agreement to
transfer the cable system.
2)
Corporate or business information documents, such as articles of
incorporation, partnership and limited partnership agreements as well as
management agreements.
3)
Financing documents, such as a bank loan agreement or commitment
letter; for limited partnerships, a proposed prospectus or offering circular,
terms, and conditions of a limited partnership agreement; for a publication
corporation, registration statements S-1 and all other forms filed with the
Securities and Exchange Commission.
4)
Current and historical financial statements of the transferee,
including growth and revenue projections, income statements, sources and uses
of funds, anticipated capital expenditures, justifications, depreciation
schedules, charges for services, expenditures, other system new-build
commitments, cash flow analysis, balance sheets, and proposed penetration rate.
This financial information and other documentation will
help the franchising authority assess the financial impact of the proposed
transfer on the system and its subscribers.
The following elements and assumptions are critical to the determination
of whether the financial projections provided by the transferee are reasonable:
1)
Profitability. There are several
components to consider a) operating ratio, b) operating margin, c) operating
expenses, and d) pre-tax profit margin.
2)
Market Factors. Several factors
should be addressed in the proforma financial statements, including basic
service penetration, pay-to-basic penetration, revenue per subscriber and
household density. These projections should
be reviewed carefully against past performance in the market.
3)
Capital Expenditures. There are many
components to the category of capital expenditures, including plant
distribution costs, pre-operating expense, headend costs, converter costs, connection
costs, building costs or leasehold improvements. The capital costs projected in the proforma
financials for such categories should be scrutinized for the reasonableness of
the assumptions compared to the general industry standards.
4)
Debt-to-Equity Ratio. The debt-to-equity
ratio is a significant measurement in the context of a transfer
transaction. This measurement shows long
term debt as a percentage of overall capitalization. A low or conservative debt-to-equity ratio
suggests the capacity to borrow additional funds. A high debt-to-equity ratio suggests a highly
leveraged entity vulnerable to slight shifts in revenue or costs.
5)
Cash Flow-Debt Service. The proforma
financials should include a cash flow or source of funds schedule indicating projected
annual income or depreciation which in turn would indicate projected cash flow,
i.e., net income plus depreciation. Each
of the foregoing components should be examined and compared to industry
standards to determine whether the projections demonstrate the proposed
transfer and subsequent operation of the cable system is financially feasible.
Conditions
for Transfer
Approval
To the extent a franchising authority determines to approve
a proposed transfer, careful consideration of the transfer resolution should be
undertaken. Be particularly careful when
utilizing a form resolution submitted as part of FCC Form 394. Often cable operators may include provisions
within such a resolution which may result in a waiver of existing franchise
violations resulting in a “clean slate” for the proposed transferee.
In other words, there may presently exist a latent
franchise violation such as failure to pay the proper franchise fee to the
franchising authority. If a transfer
resolution is executed with language indicating that the transferee assumes the
franchise free and clear, the franchising authority may be prevented from
thereafter pursuing the collection of past due franchise fees. Other common conditions for approval may
include an acceptance agreement, guaranty, performance bond/letter of
credit/security fund, and a certificate of insurance. Settlement of existing franchise obligations
is also a possibility as well as resolution of franchise violations.
Denial of
Transfer
If a franchising authority chooses to
deny the proposed transfer of control it may be based on a variety of reasons:
1)
The transferee may lack the necessary legal, technical or financial
qualifications;
2)
The transferee may not agree to comply with valid franchise
obligations; or
3)
The transferee may eliminate or reduce competition in the community in
violation of 47 U.S.C. § 533.
Moreover, in the event there is an existing franchise
violation which has not yet been cured, a franchising authority may seek
resolution of such a matter as part of a transfer proceeding.
Moss & Barnett will be working on behalf of a number of
franchising authorities to review the proposed transfer by and between AT&T
Broadband and Comcast. Moss &
Barnett will be conducting a review of the legal, technical and financial
qualifications of proposed transferee and providing recommendations for
consideration by franchising authorities.
Issues specific to franchising authorities are being handled on a case
by case basis. For additional
information regarding this proceeding please feel free to contact Brian Grogan
at 612-347-0340 or via email at groganb@moss-barnett.com.
Additional
presentation papers and more detailed materials are available regarding
transfers of ownership at our new web site: www.municipalcommunicationslaw.com.
w w w
Brian T. Grogan is a shareholder with the Minneapolis
law firm of Moss & Barnett practicing in the areas of telecommunications
and cable television law. Brian
represents entities throughout the country on franchise renewals, transfers of
ownership, competitive franchising, telecommunications planning, right-of-way
management, first amendment issues, tower siting, leasing and zoning,
litigation and other related communication matters. He is a frequent presenter at state and
national conferences regarding communications law and he is a member of the
American Bar Association (Forum Committee on Communications Law), National
Association of Telecommunications Officers and Advisors, International
Municipal Lawyers Association (Contracts, Franchises and Technology Section),
and is past chair of the Communications Law Section of the Minnesota State Bar
Association.
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Update via email or facsimile or if you have updated contact information,
please notify:
Terri Hammer, Moss & Barnett
4800 Wells Fargo Center, 90 South 7th Street
Minneapolis, MN
55402-4129
Phone: (612)
347-0349; Fax: (612) 339-6686
E-mail: hammert@moss-barnett.com
The materials in this Communications Law Update have
been complied from a variety of sources and address only a portion of the relevant
issues contained within hundreds of pages of regulations and decisions. We have not addressed many important points
that may apply to your situation. You
should consult with legal counsel before taking any action on matters covered
by this Communications Law Update.