AT&T walks divestiture tightrope

(Telephony) With billions of dollars at stake, AT&T told the FCC it disagrees with the regulator’s assertion that the carrier is obligated to make an “irrevocable” choice of assets it will divest to satisfy the conditions attached to the commission’s approval of AT&T acquisition of MediaOne.

In a letter to the FCC, AT&T general counsel James Cicconi reiterated AT&T’s position that the company can meet the agency’s divestiture requirements by spinning off Liberty Media and insulating AT&T’s 25% share in Time Warner Entertainment. However, this choice is contingent upon the IRS ruling that a spinoff could be done without a tax penalty of more than $1 billion to AT&T. Without a favorable IRS ruling, AT&T indicated it would sell the Time Warner Entertainment stake.

On Monday, the FCC said AT&T’s proposal to spin off Liberty Media did not represent an “irrevocable” choice, which the agency said was required, and that regulators would interpret the proposal as a declaration that AT&T would sell the Time Warner interest unless the carrier responded otherwise.

Cicconi responded with a letter delivered to the FCC on Wednesday that said AT&T’s interpretation of the FCC’s original order includes a contingency plan if the initial choice cannot be executed.

An AT&T spokesman noted that AT&T is not simply trying to keep its options open for the sake of avoiding a possible tax penalty.

“It’s not a business decision; for reasons of corporate law, we can’t [spin off Liberty Media if the IRS does not rule in favor of AT&T],” the spokesman said.

For this reason, AT&T did not want to represent the Liberty Media spinoff as an irrevocable divestiture choice, Cicconi wrote in his response letter to the FCC.

“If we do not receive those rulings, AT&T will not have the right either to spin off Liberty or to place it in an irrevocable trust for purposes of sale,” the letter states. “For this reason, it would not be proper for AT&T to designate this option as our ‘election’ …, because we cannot in good faith represent that our interest in Liberty could be placed in the trust.”

If the FCC rules that AT&T must sell the Time Warner Entertainment interest, analysts believe it will strip AT&T of any leverage it might have in negotiations to sell the stake. As a result, most believe it will be difficult for the carrier to receive a fair offer the stake, which many value between $14 and $16 billion. AT&T reportedly has failed to receive an offer for $10 billion for the Time Warner stake.

In November, AT&T asked the FCC to intervene and force Time Warner to negotiate in good faith for the 25% stake. However, analysts note that Time Warner has little incentive to buy out AT&T, because AT&T’s stake is structured so that it is a big investor with very little decision-making input.

Most analyst believe AT&T wants to sell its interest in Time Warner and use the cash received to pay down its debt of more than $60 billion. Rating agencies already have downgraded AT&T’s bond rating and have threatened to do so again if the company does not pay off a significant portion of its debt.