January 30, 1998

Without tax break, AirTouch renews deal to buy mobile-phone business

By SANDY SHORE
AP Business Writer

DENVER (AP) -- AirTouch Communications Inc. on Thursday renewed a deal to buy U S West Inc.'s domestic cellular phone business, paying the Baby Bell a higher price than an offer scuttled five months ago by the elimination of a federal tax loophole.

The new agreement would make San Francisco-based AirTouch the second-largest mobile-phone telephone provider in the nation, behind AT&T Corp.

AirTouch is offering $4.3 billion in common and preferred stock for Denver-based U S West Media Group's wireless phone interests and said it would assume $1.4 billion in U S West debt.

Under the plan killed last year, AirTouch would have paid U S West shareholders about $2.3 billion in stock and would have assumed $2.2 billion in debt.

Another difference is the new plan calls for AirTouch to give the stock to the company instead of shareholders, who wouldn't have paid taxes on the stock under the old federal law. AirTouch was able to include more stock value in its deal because its stock has roughly doubled in price since the initial agreement.

"The net of all this is it's very positive for U S West, it's very positive for AirTouch," said telecommunications analyst Raghu Ram of Wheat First Butcher Singer.

The agreement, subject to government approval, is expected to be completed by the summer.

If finalized, U S West Media Group, the U S West unit that owns the cellular-phone business, would concentrate on its core businesses of selling domestic cable service and overseas cable, telephone and wireless service.

The fact that the two companies found a way to complete the agreement without a tax benefit is an indication of how much they wanted to finalize the sale, Ram said.

U S West could have "played it hard," but they wanted to complete it so they could focus on their core businesses, he said.

"Investors are happy this deal is finally complete," said analyst Linda Bannister of Edward Jones in St. Louis.

Stock of U S West Media Group rose $1.81 to $29 on the New York Stock Exchange Thursday. AirTouch fell 68 cents to $44.25.

The two companies first proposed the sale in a three-phase deal announced in 1994. They completed the first phase when U S West began marketing its cellular service under the AirTouch brand name, but never finalized the other phases.

Last spring, the companies decided to complete the deal under a special tax exemption. But Congress decided the exemption was a corporate loophole and closed it, which meant U S West would have to pay as much as $250 million in federal taxes to finalize the merger.

U S West officials asked for an exemption, but that was denied in August.

AirTouch and U S West went back to the drawing board and devised the newest proposal as AirTouch's stock rose.

Under the plan, U S West Media Group would receive about $1.6 billion in preferred stock and about $2.7 billion in common stock.

AirTouch would get U S West's NewVector Group, with about 2.2 cellular customers in 12 states, adding to its roughly 7 million U.S. and overseas mobile-phone subscribers.

It also would receive U S West's interest in PrimeCo Personal Communications, which sells a combination of digital mobile phones and pagers. It was formed by AirTouch, U S West, Nynex and Bell Atlantic. With the merger, AirTouch would have 50 percent of the company.

"By adding the U.S. wireless interests of U S West Media Group, we'll significantly bolster our operating scale and expand our footprint," said Sam Ginn, AirTouch chairman and chief executive officer.

If the current deal is scrapped, the two companies plan to revert to the initial phased-in proposal.

U S West Media Group is one of two major groups owned by U S West Inc. The other is U S West Communications Inc., which provides telecommunications services in 14 states. U S West plans to divide them into separate public companies later this year, pending shareowner and other approvals.