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Jones-Bell Canada Scrap Goes to Court

Denver -- Jones Intercable Inc. and BCI Telecom HoldingsInc. (BTH) last week moved their fight over Jones Internet Channel into a U.S. DistrictCourt here.

The most compelling testimony during a hearing onBTH's request for an injunction barring further launches of the Internet-accessservice came from an architect of the 1994 deal that gave BTH -- which is owned by BellCanada International's parent, BCE Inc. -- its 30 percent stake in Jones.

Patrick Lombardi, who, as former president of JonesFinancial Group, negotiated BTH's initial $290 million investment in Jones, concededthat Internet access is not programming, as the MSO has been insisting since it launchedthe service to some 4,000 subscribers in its Washington, D.C., cluster.

"[Internet access] is not a programming service.Essentially, it's about access, conductivity, it's about transmission,"Lombardi said, adding that he informed high-ranking Jones executives of his belief beforeleaving to form his own consulting firm.

Moreover, he said, Internet access was never discussed whenhe negotiated a deal that would allow chairman Glenn Jones to continue programming sixJones channels should BTH exercise its option to acquire control of his supervotingshares.

Former BCI chief financial officer Daniel Somers, whonegotiated the deal with Lombardi before moving on to become CFO of AT&T Corp.,confirmed that "we never discussed the Internet" while hammering out BTH'sinvestment in Jones.

BTH is seeking an injunction that would prohibit anyfurther launches of JIC, claiming that its shareholders' agreement with Jonesrequires the approval of the outside directors that it has on the MSO's board forsuch moves.

BTH alleged that Jones could have offered competitiveInternet-access services like @Home Network or Time Warner Cable's Road Runner, butit instead chose to launch JIC, thereby enriching "[parent company] JonesInternational [Inc.] at the expense of Jones Intercable and all of its shareholders."

Jones International is controlled solely by Glenn Jones.

Derek Burney, chairman of BCI, said launching JIC in effect"carved out an element" of Jones' core business for the benefit of GlennJones, which would "siphon off" revenues that the MSO could have earned fromoffering cable or telephone service over the Internet.

"It nullified our right to have a say in theagreement, and it impaired our investment in Jones Intercable," Burney said.

During opening arguments, lawyers for Jones said thetransaction was permitted under Section 3.5 of the shareholders' agreement, addingthat BTH was ignoring two legal opinions supporting that position.

"We think that the contract speaks for itself, and wedon't think that the plaintiff should be allowed to rewrite it," said Martin L.Perschetz, an attorney with New York law firm Schulte Roth & Zabel LLP.

After hearing BTH's testimony, Judge Richard Matschrecessed the hearing until April 6, when Jones will present its case.

Meanwhile, sources called the lawsuit another swipe atJones by BTH.

The Canadian telecommunications outfit reportedly vetoedJones' attempt to acquire SBC Communications Inc.'s 280,000 cable subscribers inMontgomery County, Md. -- an estimated $600 million deal that could have added to theMSO's Washington cluster of 416,000 customers.

Moreover, sources said BTH has been encouraging a largeinstitutional investor in Jones to file its own lawsuit over the launch of JIC.

"It's been anything to be a thorn in Glenn'sside," said one industry insider.

Analysts believe that BTH is trying to pressure Glenn Jonesinto renegotiating the terms of a buyout agreement that obliges BTH to pay the Joneschairman north of $60 a share for his controlling stake in the MSO.

Others believe that BTH wants JIC scrapped so that it caninstall its existing Canadian Internet-access service, Simpatico, when it acquires controlof the MSO.

In a related development, Leslie Susser, anindividual shareholder in Jones, filed a separate lawsuit against the MSO, calling thelaunch of JIC a "self-dealing" transaction and a breach of fiduciary dutiesdesigned to benefit Glenn Jones and Jones International.