Council Meeting: September 27, 2005
TO: Mayor and City Council
FROM: City Staff
SUBJECT: Update
on Due Diligence Analysis related to the Adelphia Transfer to Time Warner for
Cable Television Services and Adopt Resolution Denying
Without Prejudice Applications for Transfer
This
report provides an update on the City’s due diligence to ascertain, among other
things, the legal, technical and financial qualifications associated with the
Cable TV transfer application of Adelphia to Comcast and potentially ultimately
to Time Warner. The report recommends that the City Council adopt a resolution denying
without prejudice the transfer applications.
Time
Warner Inc. and Comcast Corporation recently announced a definitive agreement
to acquire substantially the assets of Adelphia Communications Corporation. As a result Time Warner will acquire Century-TCI
(ada Adelphia) in
Under
applicable law, including the Cable Communications Policy Act of 1984, review
of requests for franchise transfer include, among other things, consideration
of the legal, technical and financial qualifications of the company and the
impact of the transfer upon rates and services. In addition, the transfer process may be used to
require that issues of non-compliance with the franchise be resolved. The City’s interest is to ensure the Franchisee’s
ability to perform, and to guarantee the performance itself, i.e. to ensure
that service is not suspended or degraded and that the construction in the
public right-of-way is not disrupted or delayed because of financial problems,
or lack of financially qualified parent guarantees. In addition, the City must
secure commitments from the new companies to cure all breaches of franchise issues
including dangerous field conditions.
Discussion
The
City and its consultants have been involved in the legal assessment and financial/operational
due diligence of the proposed transfer. Notices
of incompleteness of the application have been sent and requests for
information related to the transaction have been made to the companies. In many instances the requests have been met
with slow response and delay and in some cases with refusal to release the
necessary information. At this point in
time, the companies have not provided complete copies of the transactional
documents or financial disclosure of the leading/responsible entities. Recent press and industry reports of modifying
the partial spin-off of Time Warner Cable from Time Warner, Inc which would
change the management structure and financial interest of Time Warner Inc.
create additional uncertainty. These
factors have impeded the City’s ability to complete its review. Typically failure on the part of a company to
respond with reliable financial projections of the new company and related
parent guarantees is grounds for denial of the transfer request. It has also
been reported that the timeline for bankruptcy court approval has been delayed
because of disputes regarding the draft disclosure statement and that such
approval may not be reached until the end of the first quarter of 2006, long after
the proposed transaction was projected to be closed.
The
City’s technical experts have completed field investigations in
Meetings
have been held with all the parties. However, the issues remain unresolved.
The
franchise with Adelphia expires in October 2007. New franchise terms related to customer
service standards and an agreement on rate matters pending before the FCC will
be important to secure for
There is no budget or financial impact to the City
regarding denying without prejudice the transfer applications.
Staff
recommends that the City Council adopt a resolution denying without prejudice
applications and authorize the City Manager to continue both due diligence and
franchise compliance negotiations.
Prepared by: Kathryn Vernez, Assistant to the City Manager
for Government Relations
Attachment: Resolution
RESOLUTION NO __________ (CCS)
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF
DENYING ONE OR MORE FCC FORMS 394 RELATING TO THE
TRANSFER OF THE CABLE TELEVISION
FRANCHISE, AND/OR CONTROL THEREOF, TO AN ENTITY
CONTROLLED BY
TIME WARNER CABLE OR COMCAST CORPORATION
WHEREAS,
the City of Santa Monica (the “City”) has received one or more FCC Forms 394
(collectively, the “Application”) requesting consent of the City Council to the
assignment of the Cable Television Franchise (the “Franchise”) granted to Century-TCI
California, L.P. (aka Adelphia Communications Corporation) (the “Franchisee”),
or control thereof, to an entity (the “Proposed Transferee”) ultimately
controlled by Time Warner Cable (“TWC”) or Comcast Corporation (“Comcast”) (the
“Transfer”); and
WHEREAS,
City has tendered numerous information requests to the parties submitting the
Application (the “Applicants”) relating to, among other things, the legal,
technical, and financial qualifications of the Proposed Transferee, and the
potential impact on rates and services, all of which are incorporated by
reference in this Resolution; and
WHEREAS,
the Applicants have failed or refused to provide requested information relating
to, among other things, the following issues:
(1) Complete and accurate copies of the
relevant transactional documents, including all exhibits and schedules thereto,
which are necessary for the City to exercise its legislative authority in
reviewing the Transfer.
(2) Financial disclosures relating
specifically to the entity or entities that will possess a legally enforceable
obligation to comply with franchise obligations.
(3) Information relating to how the Transfer
will potentially impact cable services including, without limitation, how will
the operational changes will be implemented in Santa Monica, how call center
operations will be handled, if and how local offices will be merged or
reorganized, how and when will local construction and equipment needs will be
financed and prioritized, the rollout schedule for new services, and other
issues which relate directly to the day-to-day operations of the Proposed
Transferee.
(4) The potential impact of the Deferred
Prosecution Agreement between Time Warner and the Department of Justice upon
Proposed Transferee’s legal qualifications and the continued viability of Time
Warner and its affiliates and subsidiaries; and
WHEREAS,
the Applicants unreasonably delayed, refused or failed to provide a material
portion of the requested information; and
WHEREAS,
given the failure of the Applicants to provide all requested information, and
further given the existence of the various issues outlined in this Resolution,
the City, through its staff and attorneys, has requested that the Applicants
extend the 120-day review period specified in Section 617 of the Cable
Communications Policy Act of 1984, as amended (the “Cable Act”); and
WHEREAS,
the Applicants have failed or refused to timely extend the 120-day review
period; and
WHEREAS,
City staff has reviewed the FCC Form 394, all supplemental information
submitted in relation thereto, as well as information compiled in any
compliance audit, and the various Staff reports and related documents; and
WHEREAS,
the City has determined that it would not be in the public interest in the
exercise of its legislative discretion to approve the Transfer at this point in
time and has determined that it would be in the public interest to disapprove
the Transfer without prejudice subject to potential future and further
consideration,
NOW,
THEREFORE, THE CITY COUNCIL OF THE CITY OF
SECTION
1. The Application for approval of the
Transfer is hereby rejected and denied without prejudice for one, or more, or
all of the following reasons:
A. Failure to timely provide “additional
information required by the terms of the Franchise Agreement or applicable
state or local law”;
B. Failure to timely provide other requested
additional information;
C. Failure on the part of the Applicant to
timely cooperate with City staff, and its attorneys and consultants, in
performing due diligence relating to the Application, the legal, technical, and
financial qualifications of the Proposed Transferee and/or the impact of the
transaction upon cable television rates and/or services;
D. Failure to timely cure any outstanding
breach of franchise, prior to or as an express condition of approval of the
transaction in a manner acceptable to the City Manager; including matters
related to unsafe conditions caused by violation of mandatory safety codes and
failure to comply with MDU upgrade requirements.
E. Failure to demonstrate the legal,
technical and financial qualifications of the Transferee;
F. Failure to provide a written financial
guarantee, acceptable as to form and substance by the City Manager, of the
legal entity(s) for which financial disclosure was provided in the Application
and/or additional filings;
G. Filing FCC Forms 394 providing for potentially
different Transferees;
H. The facial invalidity of the FCC Form
394 relating to the “Exchange Transaction” based upon the lack of legal
authority for Comcast to execute said form.
SECTION
2. The Recitals above are hereby declared
to be true, accurate, and correct.
SECTION
3. The Proposed Transferee has failed to
demonstrate that it is a technically and financially qualified applicant for
the following reasons:
A. The burden of proof is upon the Proposed
Transferee to demonstrate its legal, technical, and financial qualifications to
assume control of the Franchise and the Franchisee.
B. The Proposed Transferee has failed to
present any business plan or other documents indicating its short-term and
long-term intent as to how it will operate the cable television system and how
it intends to achieve an acceptable and reasonable return of and on its
investment.
C. The City has attempted to carefully
review the financial qualifications of the Proposed Transferee. In order to determine the qualifications of a
buyer for a cable television system, or a series of cable television systems,
it is necessary to not only review the personal wealth, or lack thereof, of the
individual or entity assuming control of the franchise operations, but it is
also necessary to evaluate the economic reasonableness of the transaction to
determine whether the transaction will impose unreasonable financial burdens
upon the purchaser which could result in material rate increases beyond that
associated with normal operation of a cable system, reduction in service
quality based upon cost cutting and expense minimalization, or a combination
thereof, a premature sale of the system, or financial insolvency. The lack of financial qualifications on the
part of the Proposed Transferee can impose significant and serious financial
consequences upon the City and its subscribers.
These kinds of concerns should not be underestimated even in the case of
an extremely wealthy individual purchaser or parent entity who possesses
absolutely no experience in the operation of cable television systems and the
provision of cable television services.
The Proposed Transferee has failed to provide the necessary information
to perform this critical analysis.
D. The individual wealth of a proposed
purchaser, corporate or personal, is only the starting point for the financial
qualification analysis. Obviously, if
the proposed purchaser does not possess sufficient cash or borrowing capacity to
acquire necessary proceeds to close the transaction, financial unsuitability is
established. In addition, if the
proposed purchaser does not possess sufficient financial resources, by way of
cash or reasonable and customary borrowing capacity, to operate the system,
meet current and long-term liabilities when due including, but not limited to,
capital expenditure requirements, financial unsuitability is the logical
conclusion. However, even in the case of
a proposed purchaser which possesses sufficient cash to close the transaction
and operate the system consistent with franchise requirements, there are
circumstances under which a buyer or Proposed Transferee may assume such
financial obligations that render it financially impossible for that buyer,
absent massive influxes of additional capital, to operate that cable television
system in a manner which pays current and long-term liabilities, covers debt
service, and provides a reasonable and adequate return of and on equity
investment as prescribed in the Regulations of the Federal Communications
Commission (the “Commission”).
E. The Applicants have failed to provide
evidence denying the existence of the various risks described above or
demonstrating the potential benefits to the City and subscribers which might
justify the incurrence of the risks described above.
F. Given the risks associated with the
Transfer, as identified above, it will not be in the public interest for the
City to unconditionally approve the Transfer at this time. This disapproval of the Transfer contained herein
is without prejudice and may be reconsidered by the City Council when and if
the Applicants are able to present evidence demonstrating the Proposed
Transferee’s technical and financial suitability and the lack of a negative
impact on rates and/or services.
G. The Applicants have asked the City to
determine the legal, technical, and financial qualifications for the Transfer
based solely upon the legal, technical, and financial qualifications of the
proposed parent entity. The Applicants
have failed to present sufficient information to the City sustaining, if
otherwise sustainable, a finding of legal, technical, and financial
qualifications other than in relation to Time Warner. More specifically, and without limitation, absent
the financial qualifications of Time Warner as set forth in the FCC Form 394
which utilizes the financial disclosure of the parent entity as the sole
justification for financial qualifications, the Applicants could make no
reasonable argument whatsoever for a finding of financial qualification. Notwithstanding the Applicants’ reliance upon
the financial disclosure of the parent entity, the City has been informed by
authorized attorneys for the Applicants that no transfer agreement can include
the Proposed Transferee as an obligated party thereto. It is reasonable to conclude that the
proposed parent entity is not willing to commit the assets set forth in FCC
Form 394 to franchise obligations and thus the use of the financial
qualifications of the proposed parent entity is inappropriate since those
assets are not pledged or otherwise made legally available for the performance
of franchise obligations. Thus, based
upon the express refusal of the proposed parent entity to commit the financial
resources identified in FCC Form 394, or any specific portion thereof, to
performance of franchise obligations, the Proposed Transferee is hereby found
not to possess the financial qualifications to control the Franchise.
SECTION
4. A transfer of the Franchise, transfer
of actual or managerial control of the Franchise, and/or transfer of control of
the Franchisee, shall be deemed a material breach of the Franchise.
SECTION
5. The decision pursuant to this
Resolution shall, without further action of the City Council, constitute an act
of the Franchising Authority within the meaning of 47 C.F.R. § 76.502 and a
“final decision” of the City Council within the meaning of § 617(e) of the
Cable Television Consumer Protection and Competition Act of 1992, Pub. L.No.
103-385, 106 Stat. 1477 (1992).
SECTION
6. This denial, disapproval, and
rejection issued pursuant to this Resolution shall be deemed “without
prejudice” to the ability of the Applicant to file another FCC Form 394
relating to the same or a different transaction. However, nothing herein shall limit the
authority of the City Council, or its written designee, to reject any
subsequent FCC Form 394 based upon the same grounds set forth in the written
notice of denial or such other grounds as might exist in relation to a future
FCC Form 394.
SECTION
7. The City Clerk shall certify to the
adoption of this Resolution, and thenceforth and thereafter, the same shall be
in full force and effect.
APPROVED AS TO FORM:
______________________________
MARSHA JONES MOUTRIE
City Attorney