SWAP MEET STARTS12/05/1999 7:00 PM Eastern
Charter Communications got its rationalization ball rolling
last week, cutting a deal with AT&T Broadband & Internet Services to swap systems
with more than 1.3 million subscribers.
The highlights: Charter will end up with more than 800,000
subscribers in a St.-Louis-centered "supercluster," while AT&T Broadband
solidifies its grasp on the Dallas area by getting the long-coveted Fort Worth, Texas,
AT&T Broadband has lusted after the Fort Worth system
since it was owned by Marcus Cable, which Microsoft Corp. cofounder Paul Allen bought in
1998, at the start of his buying spree that later included Charter.
The deal nets Charter its hometown system -- the city of
St. Louis -- among other properties in that area.
Sources said former AT&T Broadband CEO Leo J. Hindery
Jr. started talking with Charter before he left the company in October. Executive vice
president William Fitzgerald worked out the details with Charter president and CEO Jerald
The big swap comes soon after Comcast Corp.'s grab of 1.25
million subscribers -- mostly in and around its hometown of Philadelphia -- from Lenfest
Communications Inc. by way of Lenfest half-owner AT&T Broadband.
The Comcast deals helped to fill in what the No. 3 U.S. MSO
called a 4.3 million-subscriber East Coast mega-cluster.
Now, with St. Louis and Dallas settled, analysts wonder
what's next on No. 4 Charter's and No. 1 AT&T Broadband's plates.
Both said they want to further consolidate their systems --
especially Charter, which is scattered across the country. They are most likely to do that
Several analysts believe that next on the agenda for
Charter will be Los Angeles, where the MSO has about 500,000 subscribers. Adelphia
Communications Corp. has about 1 million subscribers there, while MediaOne Group Inc.
(which is being bought by AT&T Broadband parent AT&T Corp.) and Time Warner Cable
control another 1 million between them.
"Charter's main concentration of subscribers is in the
Northwest, the Southeast and in Los Angeles," CIBC Oppenheimer Corp. cable and
telecommunications analyst Aryeh Bourkoff said. "Clearly, Charter has an incentive
not only to swap, but to more quickly roll out advanced services."
"It will be more expensive [to rationalize Los
Angeles], but I think the Los Angeles market is a very strategic cluster for
Charter," he added
Many feel that Charter will be a buyer, rather than a
seller, in Los Angeles, primarily because Allen's investment in cable overbuilder and
telecommunications company RCN Corp. calls for that company to offer telephony service in
the Los Angeles market.
For the time being, it appears that both Charter and
AT&T Broadband will focus on integrating the systems they're getting from each other.
As part of the transaction (now at letter-of-intent stage),
Charter gets St. Louis and other Missouri systems, along with ones in Illinois, Alabama
and Georgia -- a total of roughly 704,000 subscribers.
AT&T Broadband gets an undisclosed amount of cash and
systems with 632,000 customers in Fort Worth and communities in Massachusetts,
Connecticut, California, Tennessee and Kentucky.
Given the difference in subscribers -- 72,000 -- the cash
component could be around $216 million, assuming a price of $3,000 per customer.
Charter swells above 525,000 customers in the St. Louis
hub. Lumping in its systems in Illinois, Charter will have an 800,000-subscriber
AT&T Broadband's metropolitan Dallas-Fort Worth cluster
grows from 475,000 subscribers to nearly 700,000. AT&T Broadband also gets systems
with 230,000 customers in the Boston and Worcester, Mass., areas; 50,000 in Santa Cruz,
Calif.; and 95,000 in and around Willimantic and Newtown, Conn.
The Bay State pickups suggest that AT&T Broadband could
be going after the Cablevision Systems Corp. operations that are up for sale in that area.
Cablevision put its Boston system -- which has 354,000 customers -- and operations in
Cleveland and Kalamazoo, Mich., on the block in September. The company is expected to
select buyers by the end of the year.
"[AT&T is] the most likely buyer of the
Cablevision properties in Boston," Bourkoff said.
AT&T Broadband stands to gain an additional 1.1 million
subscribers in Boston as a result of its pending merger with MediaOne. But AT&T
Broadband spokeswoman LaRae Marsik warned against jumping to conclusions. "That's a
presumption you can't make right now," she said.
Charter's publicly traded stock rose slightly on the news,
hitting $26.25 per share -- up $1.37 -- in early trading Dec. 2 before closing at $25.13,
up 25 cents. AT&T's share price dipped 38 cents to $55.31 that same day.
"Charter's strategy for growth from the beginning has
been to geographically cluster our cable systems to gain operating efficiencies and
economies of scale," Kent said in a prepared statement. "We are upgrading our
cable infrastructure to offer customers digital-cable television and high-speed Internet
and to build in the capacity for full broadband-portal services."
Charter finished rebuilding the often-troubled Fort Worth
systems in late November.
Franchise transfers and other closing conditions are
expected to take several months.
Standing in the way of the St. Louis transfer is a recent
open-access ordinance enacted by the city that would compel Charter to unbundle its
network in order to gain control of 56,000 AT&T Broadband subscribers there. If not,
the city could theoretically decline to renew a franchise extension that is scheduled to
expire in April.
But AT&T Broadband may have thrown up a roadblock that
will prevent the city from lifting its franchise. It's circulating a petition that would
force the St. Louis Board of Aldermen to reconsider the ordinance or send the issue to the
voters sometime next year. In the meantime, the open-access ordinance cannot be enforced.
Board president Francis Slay, informed of the pending deal
early last week, declined to comment except to say that Charter will have to deal with the
access ordinance when the extension expires in April.
Sources said rumors of a deal with AT&T Broadband began
circulating after Charter executives told the board the MSO was interested in acquiring
the entire market, "but not with open access."
In the meantime, St. Louis regulators said the proposed
system swap leaves negotiations on a franchise renewal up in the air.
"Is it a renewal followed by a transfer, or a transfer
followed by a renewal?" asked cable administrator Susan Littlefield. "Do you do
a good deal with the incumbent, who isn't going to care because he's leaving? That makes a
transfer more difficult, and it leaves regulators wondering what to do next."
The swap took some Fort Worth regulators by surprise, even
after they heard that Charter senior vice president of operations Dave Barford was
arriving in town last week.
Local officials in Fort Worth -- where AT&T Broadband
would acquire 70,000 cable subscribers -- asked Charter officials about the system's
future last summer because they were concerned about "being bounced around" so
soon after going through the transfer process from Marcus to Charter, assistant city
manager Pat Svacina said.
Officials thought nothing was in the works, though, after
Barford indicated that the MSO was interested in staying in the local market.
"He acknowledged that discussions had taken place, but
[said] that Charter felt like the Fort Worth market was one they felt they needed to be
in," Svacina said.