PacTel Agrees to Buy an Option on Chicago Cable TV Operation

In a bid to become the first regional Bell telephone company in domestic cable television, Pacific Telesis Group agreed Thursday to acquire an option on 68% of a cable operation in Chicago.

The San Francisco-based parent of Pacific Bell would pay $650,000 a year for a four-year option on the stake. Prime Cable has an agreement in principle to buy the entire Chicago operation, which has 97,000 subscribers, from Group W Satellite Communications for $198 million. Prime Cable is to sell a 68% interest to its financial partner, Transamerica Corp., which has agreed to sell the option to Pacific Telesis.

The deal faces a major hurdle: A federal court decree has banned the so-called Baby Bell companies, including Pacific Telesis, from providing cable service anywhere in the United States. The company said it will ask for a waiver of the 5-year-old decree’s provisions for the Chicago operation.

Although the Justice Department has OKd the deal, the company must have the approval of U.S. District Judge Harold Greene. The judge oversees the administration of the 1984 order, which set the terms for the breakup of the American Telephone & Telegraph system.

The current price of Pacific Telesis’ 68% interest in the Chicago operation would be $134.6 million, a spokeswoman said, but interest rates and the appreciation in value of cable properties would increase that price over time.

The deal drew an immediate response from the cable television industry, which has expressed fear that regional phone systems could be used to compete unfairly with cable operators.

The National Cable Television Assn. in Washington said it will oppose the waiver. The decree “is premised on justifiable fears of telephone companies using their huge monopoly phone business to cross-subsidize and otherwise impede competition,� said President James P. Mooney.

Ironically, the biggest cable operator, Tele-Communications Inc. of Denver, does not oppose involvement of telephone companies in cable business as long as it is outside their own service areas. Vice President Robert Thompson said Thursday, however, that TCI “does not feel strongly enough to make an issue of it� with the association’s majority.

His firm’s “real concern,� added Thompson, is that a phone company--as a regulated monopoly--could “cross-subsidize� a cable service in its own area, meaning that profits of the phone system could be used to subsidize unfairly low cable rates. That, he said, would be “of serious and dramatic concern to everyone in the cable industry and, I suspect, regulators and legislators.�

On the other hand, the National Assn. of Broadcasters and a consumer advocate told a congressional committee this month that the cable industry itself is a monopoly that should be regulated.

Pacific Telesis, which invested last year in a London cable TV operation, said “the Chicago franchises are a logical extension of our cable venture in London.�

Analyst Sharon Armbrust of Paul Kagan Associates in Carmel said: “A waiver doesn’t mean a free-for-all entry, but it’s a start.�