On the Brink of Merger

Apr 25, 2005  •  Post A Comment

The agreement between Time Warner and Comcast to purchase Adelphia Communications for $17.6 billion leaves observers and analysts wondering what’s next in this latest wave of cable-industry consolidation.

Analysts have long believed that the closely watched Adelphia sale was likely to trigger a series of transactions that would enable cable operators to shore up their regional clusters, shed systems deemed nonessential and give hungry private-equity funds the chance to put the billions of dollars earmarked for cable to work.

Which cable operator might be next remains an open question. While the Adelphia sale is likely the largest to be executed in this latest bout of merger mania, a number of candidates are seen as waiting in the wings.

What’s Next?

Among them: Cablevision, the Long Island, N.Y.-based operator that itself tried to snag Adelphia with a series of last-minute offers. With around 3 million subscribers generally in the New York metropolitan area, Cablevision has long been seen as a likely acquisition target for either Time Warner, which owns systems in New York, or the nation’s largest operator, Comcast.

Speculation that Cablevision was a likely acquisition target has been a popular subject with cable industry players for years, but in recent months has gained momentum amid an internal fight among members of the founding Dolan family over the fate of a failed satellite venture hatched by Cablevision Chairman Charles Dolan.

Mr. Dolan has long been seen as an impediment to a sale of Cablevision because he has often demanded a high price for his systems. However, Wall Street types began to salivate several weeks ago after Mr. Dolan indicated he would be willing to dip into his own personal fortune-most of which is tied up in Cablevision stock-to keep his satellite business afloat. Although Cablevision is now beginning the process of shutting down that satellite operation-with Mr. Dolan’s blessing-there is a sense among some analysts that the 78-year-old Mr. Dolan might be losing interest in the cable business, and that the company could be ripe for a sale.

Another candidate is Cox Communications, the cable operator that was taken private last year by controlling shareholder Cox Enterprises.

For weeks there has been market chatter that Cox might look to sell as many as four cable systems totaling 900,000 subscribers and valued at nearly $1.8 billion. The systems are located in about eight states and are reportedly deemed nonessential to Cox, which has strong clusters in places such as San Diego, Orange County, Calif., and Northern Virginia.

Charter Communications, the cable company controlled by Microsoft co-founder Paul Allen, is another possible seller. Laboring under a massive amount of debt, Charter officials have said in the past that they would consider asset sales as a way to pare down the company’s debt load. While selling noncore systems is a distinct possibility, questions about Charter’s long-term viability could lead to an overall sale of the company.

Adelphia late last week inked a deal in which Time Warner and Comcast will pay $12.7 billion in cash and Time Warner will offer up 16 percent of its cable unit, which will be spun off into a publicly traded company. The companies value the stock portion of the deal at around $5 billion.

Time Warner and Comcast will also swap cable systems as part of a related transaction in which Comcast will unwind its 21 percent stake in Time Warner’s cable unit.

Pending regulatory approvals and the OK from the bankruptcy court judge presiding over Adelphia, Time Warner will gain nearly 3.5 million basic-cable subscribers and will emerge as the leading cable operator in Los Angeles. Comcast, meanwhile, will add approximately 1.8 million basic-cable subscribers, enhancing existing clusters in the Washington area, Florida, Massachusetts and Pennsylvania.

Terms of the Deal

Further, Time Warner will pay Comcast $2 billion in cash and hand over about 750,000 cable subscribers in exchange for Comcast’s 21 percent stake in Time Warner Cable. Meanwhile, Comcast will hand over about 1 million subscribers, including those who are part of a joint venture in Los Angeles between Comcast and Adelphia.

Included in the deal are about 225,000 cable subscribers in systems owned by Adelphia’s founding Rigas family that Adelphia has managed for years. The federal government at one point was trying to seize the systems to pay off a claim against Adelphia. Time Warner officials said those negotiations are ongoing, though they are hopeful the issue can be resolved and the systems can be included in the sale. However, Time Warner said it has made provisions to lower the final sale price should the systems be excluded from the overall deal.

A pair of joint ventures in Kansas City, Mo., and Texas, under which Time Warner and Comcast each own 50 percent stakes, are not impacted by last week’s transaction.

In acquiring Adelphia, Time Warner and Comcast closed a storied sales process that at one point attracted well over 20 suitors, including Cablevision Systems, which at the 11th hour swooped in with first a $16.5 billion all-cash offer and later a sweetened $17.1 billion offer. Though most analysts viewed Cablevision’s last-minute bid as a long shot, it raised the possibility that Time Warner and Comcast, long viewed as the frontrunners, might be in for a protracted fight for Adelphia.

A Wave of Consolidation

The pending wave of consolidation that could be triggered by the Adelphia sale comes amid a confluence of events that have made the conditions right for dealmaking. In particular, large cable operators are looking to shed outlying systems in favor of concentrating on bolstering their presence in regions where they already own cable systems.

At the same time, cash-flush private-equity firms are aggressively looking to get into the cable business, with its robust returns and substantial cash flow.

That was the reasoning behind the losing $15 billion bid put together by private-equity firms Kohlberg Kravis Roberts & Co. and Providence Equity Partners for Adelphia. The Carlyle Group, another top-tier private-equity firm, is joining forces with the management of Insight Communications to take that small cable operator private. Private-equity money is also expected to chase after any systems put up for sale by Cox.