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Comcast, TW Eye Adelphia

Oct 4, 2004  •  Post A Comment

What a difference a couple of weeks make.

Two weeks ago, cable giant Comcast and media titan Time Warner were rivals in the quest to snag the assets of film studio Metro-Goldwyn-Mayer. Comcast ultimately won out, joining an investment consortium led by Japanese conglomerate Sony that paid $4.8 billion for the venerable studio. Out of the deal, Comcast gets access to Sony’s and MGM’s film libraries, which will bolster Comcast’s burgeoning video-on-demand service.

Today it is looking more and more as though these former rivals are about to become partners, exploring the possibility of putting together a joint bid for the assets of bankrupt cable operator Adelphia Communications.

While both companies declined to provide details of where their discussions are going, the fact that they are considering joining forces for Adelphia is generally being greeted with praise among Wall Street players, who for months have speculated the two companies would end up having to work together in some fashion if either goes after Adelphia.

Comcast’s Stake

One key reason is the 21 percent stake that Comcast holds in Time Warner Cable. Comcast inherited the stake when it purchased AT&T Broadband in late 2002, and for some time has been interested in trying to monetize that interest.

Last week Comcast moved one step closer to turning that stake into something it can use, unveiling a plan under which Comcast will begin unwinding the partnership later this year.

Under the terms of the agreement the two companies reached, Comcast from Dec. 1, 2004, to April 1, 2005 has the right to require Time Warner Cable to redeem a portion of Comcast’s stake in the cable unit in exchange for 100 percent of the common stock of a Time Warner Cable subsidiary that will own cable systems serving around 90,000 basic cable subscribers and hold around $750 million in cash. After the completion of the transaction, Comcast’s stake in Time Warner cable will be reduced to about 17 percent.

Analysts see the move, which has been in the works for months, setting in motion a plan between the two companies to jointly go after Adelphia, which has nearly 5.4 million subscribers and was officially put up for sale last month.

Time Warner and Comcast are two of what is expected to be as many as 20 bidders vying for some or all of Adelphia. Others include several private-equity consortiums. Even debt-laden cable operator Charter Communications has expressed an interest in some of Adelphia’s system, though it is unclear whether majority shareholder Paul Allen will be willing to help finance such a purchase, which is widely seen as a way for Charter to generate more cash flow with which to pay down debt.

Jessica Reif Cohen, an analyst at Merrill Lynch, said in a research note last week that the deal “provides a mutually beneficial path for Comcast to participate in Time Warner Cable’s potential acquisition of Adelphia, which has begun to take shape. In other words, TWC and Comcast are participating in concert in regard to the Adelphia bidding process.”

By pooling their resources, analysts say both companies reduce their exposure to a purchase that could fetch between $17 billion and $20 billion.

“We believe Time Warner agreed to grant the option in order to maintain flexibility to pursue an acquisition of Adelphia,” Credit Suisse First Boston analyst William Drewry said.

By tying the unwinding of their partnership to a joint bid for Adelphia, sources said, the companies could come up with a tax-free way to dissolve Comcast’s Time Warner Cable stake. At the same time, by teaming up, the companies could win Adelphia without either having to take a huge hit to its bottom line.