CHANGING TAX LAW JEOPARDIZES AIRTOUCH DEAL.

Byline: David E. Kalish Associated Press 

AirTouch Communications Inc. agreed to buy the domestic mobile-phone business of U S West Communications, but the deal was threatened Friday by a drive in Washington to eliminate a tax break key to the merger.

While the $2.3 billion purchase would create the nation's No. 2 wireless telephone company, the tax debate quickly overshadowed what would be a significant industry shakeup.

AirTouch and U S West hope to get an exception to the proposed rule by stressing that they've been talking about the deal for months, and that it was announced so shortly after the legislation's introduction.

Industry observers said the deal had an even chance of being completed and noted that the legislation has the support of President Clinton and congressional Republicans.

``I would say, 50-50,'' said David Roddy, chief telecommunications economist at Deloitte & Touche LLP's U.S. consulting unit.

The sale would make San Francisco-based AirTouch second only to AT&T Corp. in the wireless business, ratcheting up the competition in the fast-growing U.S. market for go-anywhere phones. It also would help U S West, a regional phone company with customers in 14 Western states, pare its steep debt load as it expands into new businesses such as high-speed Internet access through cable lines.

In addition to issuing stock to U S West stockholders, AirTouch will assume $2.2 billion in U S West debt in the deal. U S West, with about $14.3 billion in debt, must pay high interest rates to investors and hopes that a reduced debt load will lower its borrowing costs.

Yet the companies said they would pursue the transaction only if Congress preserves the rules that make it tax-free. The deal assumes that AirTouch stock will be distributed tax-free to shareholders of U S West Media Group, a unit of U S West.

The legislation was introduced Wednesday and would affect mergers after that date. The companies said they announced the deal Thursday, although they didn't issue a release until shortly before midnight Pacific time Thursday.

``Unfortunately, we concluded the talks one day late for the legislation,'' said AirTouch spokeswoman Susan Rosenberg. She said the two sides signed the agreement as quickly as they could.

U S West, based in Englewood, Colo., is one of the regional phone companies formed when AT&T Corp. was broken up in 1984. AirTouch was spun off from Pacific Telesis Group, another regional phone company, in 1994.