Introduction
Why
should your city take action when faced with a change of control of your local
cable television franchise? Cable
operators and even some cities may argue that given that there may be no change
in the grantee serving your cable system a review of the qualifications and
thorough transfer process is unnecessary.
History has shown, however, that a change of control, even at the
highest levels of a corporate entity, often results in significant operational
changes at the local level. Further, the
impact on a company’s overall financial structure may be profound. One need only look to the Time Warner AOL
merger as an example of how even the best laid plans may not be achieved in a
volatile marketplace.
The
transfer process also provides an opportunity for local franchising authorities
(LFAs) to correct past performance issues under an existing franchise. To the extent an existing franchise violation
or ambiguous provision exists, the transfer process provides an opportunity to
obtain clarification and resolution. The
transfer proceeding can also be used to obtain appropriate financial assurances
including guarantees, security funds, or performance bonds based on the
financial qualifications of the proposed transferee. For those communities facing franchise
renewal, the transfer process may provide an opportunity to accelerate renewal
negotiations and arrive at final franchise documents to ensure that commitments
will be honored following the transfer.
This
paper will focus primarily on the transfer proceeding currently dominating
nearly one-third of all LFAs across the country. The AT&T Comcast merger affects thousands
of LFAs and is rapidly approaching the 120 day federal deadline. This paper will provide a cursory review of
the legal, technical and financial qualifications of the proposed AT&T
Comcast Corporation and will highlight applicable laws and issues to be
considered when reviewing the transaction.
Applicable
Law
Federal Law
The Cable Communications Policy Act of 1984, as
amended by the Cable Consumer Protection and Competition Act of 1992 and the
Telecommunications Act of 1996 (“Cable Act”), provides at Section 617 (47
U.S.C. § 537):
Sales
of Cable Systems
A
franchising authority shall, if the franchise requires franchising authority
approval of a sale or transfer, have 120 days to act upon any request for
approval of such sale or transfer that contains or is accompanied by such
information as is required in accordance with City regulations and by the franchising
authority. If the franchising authority
fails to render a final decision on the request within 120 days, such request
shall be deemed granted unless the requesting party and the franchising
authority agree to an extension of time.
The Cable Act also provides at Section 613(d) (47
U.S.C. § 533(d)) as follows:
(d) Regulation
of ownership by States or franchising authorities
Any State
or franchising authority may not prohibit the ownership or control of a cable
system by any person because of such person’s ownership or control of any other
media of mass communications or other media interests. Nothing in this section shall be construed to
prevent any State or franchising authority from prohibiting the ownership or
control of a cable system in a jurisdiction by any person (1) because of such
person’s ownership or control of any other cable system in such jurisdiction,
or (2) in circumstances in which the State or franchising authority determines
that the acquisition of such a cable system may eliminate or reduce competition
in the delivery of cable service in such jurisdiction.
Further, the Federal Communications Commission
(“FCC”) has promulgated regulations governing the sale of cable systems. Section 76.502 of the FCC’s regulations (47
C.F.R. § 76.502) provides:
47 C.F.R. § 76.502 Time Limits Applicable to Franchise
Authority Consideration of Transfer Applications
(a)
A franchise authority shall have 120 days from the
date of submission of a completed FCC Form 394, together with all exhibits, and
any additional information required by the terms of the franchise agreement or
applicable state or local law to act upon an application to sell, assign, or
otherwise transfer controlling ownership of a cable system.
(b)
A franchise authority that questions the accuracy of
the information provided under paragraph (a) must notify the cable operator
within 30 days of the filing of such information, or such information shall be
deemed accepted, unless the cable operator has failed to provide any additional
information reasonably requested by the franchise authority within 10 days of
such request.
(c)
If the franchise authority fails to act upon such
transfer request within 120 days, such request shall be deemed granted unless
the franchise authority and the requesting party otherwise agree to an
extension of time.
NOTE: LFAs
should also carefully review all applicable state law and the local franchise
to identify any additional requirements to be followed.
Description
of the AT&T/Comcast Transaction
AT&T
Corp. (“AT&T”), Comcast Corporation, (“Comcast”), and related subsidiaries
entered into an Agreement and Plan of Merger dated December 19, 2001, (“Merger
Agreement”) pursuant to which AT&T Comcast will become the new parent
corporation of Comcast and AT&T’s newly created cable television
subsidiary. AT&T will contribute its
cable television assets to a new subsidiary in a tax-free transaction prior to
the Merger. AT&T Comcast will also enter into a Support Agreement with
Sural LLC, an entity controlled by Mr. Brian L. Roberts which holds
approximately 86.7% of the voting power of Comcast, to provide various
management services. AT&T Comcast
has entered into an Exchange Agreement with Microsoft Corporation that will
provide for a conversion of $5 billion of indebtedness to 115 million shares of
AT&T Comcast common stock. AT&T
Comcast will be the largest cable operator with $19 billion in annual revenues
and in excess of 22 million subscribers.
Merger Agreement
Pursuant
to the Merger Agreement, AT&T Broadband Merger Sub will merge with and into
AT&T Broadband, with AT&T Broadband continuing as the surviving
corporation in the merger and, as a result of such merger, becoming a wholly
owned subsidiary of AT&T Comcast (the “AT&T Broadband Merger”). On the same effective date as the AT&T
Broadband Merger, Comcast Acquisition Corp. will merge with and into Comcast, with Comcast
continuing as the surviving corporation in the merger and, as a result of such
merger, becoming a wholly owned subsidiary of AT&T Comcast (the “Comcast
Merger”). The AT&T Broadband Merger
and the Comcast Merger are referred to herein collectively as the “Mergers”).
MERGERS
RESULTING STRUCTURE
The closing date for the Mergers will occur as soon
as practicable following the satisfaction or waiver of conditions to the
Mergers set forth in the Merger Agreement. The Mergers will be effective on the
same effective date, but after the completion of the separation and
distribution by AT&T of certain assets and the corresponding assumption of
certain liabilities of AT&T’s Broadband business operations by AT&T
Broadband, in a transaction described as an internal restructuring and
“spin-off” of the Broadband operations.
The consideration to be issued in the Mergers will
be shares of various classes of AT&T Comcast common stock. The rights of the classes of AT&T Comcast
common stock to be issued in the Mergers is dependent upon whether the holders
of Comcast Class A common stock and Class B common stock approve what is
referred to in the Merger Agreement as the “Preferred Structure”. If the Preferred Structure is not approved by
the holders of Comcast Class A common stock and Class B common stock, the
Mergers, if approved by the AT&T and Comcast shareholders, generally, will
be completed under what is described as the “Alternative Structure”.
Under either the Preferred Structure or Alternative
Structure, the Comcast Class B shareholders, who own approximately 86.6% of the
Comcast’s voting power, will own 33-1/3% of AT&T Comcast voting power upon
completion of the AT&T Comcast transaction.
A description of the securities to be exchanged in the Preferred
Structure and Alternative Structure follows:
Preferred Structure
If the Preferred Structure is approved by the
applicable holders of Comcast Class A common stock and Class B common stock,
the AT&T Broadband shareholders and the holders of Comcast Class A common
stock will receive shares of AT&T Comcast Class A common stock based on
applicable exchange ratios set forth in the Merger Agreement; the holders of
Comcast Class B common stock will receive shares of AT&T Comcast Class B
common stock; and the holders of Comcast Class A special common stock will
receive shares of AT&T Comcast Class A special common stock.
Alternative Structure
In the event the Mergers are consummated under
circumstances where the Alternative Structure is implemented, the holders of
Comcast Class B common stock will receive AT&T Comcast Class B common
stock; the holders of AT&T Broadband common stock will receive shares of
AT&T Comcast Class C common stock; the holders of Comcast Class A common
stock will receive shares of AT&T Comcast Class A common stock; and the
holders of Comcast Class A special common stock will receive shares of AT&T
Comcast Class A special common stock.
The applicable exchange ratios for the shares of common stock are set
forth in the Merger Agreement and will be determined based on the number of
outstanding shares of common stock as of the closing date of the Mergers. If the Mergers were consummated as of April
10, 2002, and without giving effect to the issuance of any additional shares of
common stock that may be required to be issued under the Merger Agreement, the
tables below describe the relative economic and voting interest of the AT&T
Broadband and Comcast shareholders upon the consummation of the Mergers under
the Preferred Structure and Alternative Structure, including the effect of the
Microsoft Quips transfer.
TABLE OF ECONOMIC INTEREST
PERCENTAGES
SHAREHOLDERS
OF AT&T BROADBAND AND COMCAST CORPORATION
(giving
effect to the Mergers using assumptions set forth in the AT&T Comcast S-4A)