PRIME TIME FOR COMCAST Comcast Lends MSO $735M for D.C., Chicago12/13/1998 7:00 PM Eastern
Comcast Corp. has agreed to invest in and ultimately buycontrol of Prime Communications LLC's cable systems near Washington, D.C. and inChicago, totalling about 430,000 subscribers for up to $1.45 billion, the companies saidFriday.
Comcast said it would lend Prime $735 million and get anote that can be converted into 90 percent equity in Prime after ongoing rebuilds inMaryland and Virginia are completed in mid-2002. Including assumed debt, an option to buythe other 10 percent and other deal points, the total cost to Comcast could amount to$1.45 billion, company executives told analysts. That's about 12 times annualizedcash flow for the operations, according to Comcast.
Comcast's stock price rose on the news.
"It's growth through consolidation in a logicalway at what's become a mid-range industry multiple," said SG Cowen SecuritiesCorp. analyst Gary Farber.
Comcast plans to pay for the deal by selling non-coreassets, probably including AT&T Corp. stock it got from the sale of TeleportCommunications Group.
Though the deal was somewhat complex and will take a whileto close, Comcast president Brian Roberts told analysts in a conference call, "Webelieve that complexity ultimately results in favorable terms to Comcast shareholders.
"This transaction is a home run," Roberts added.
Comcast, which is also buying control of Jones IntercableInc., mainly for its Washington-area cluster, has been openly shopping for systems at atime when prices are high and the supply of available systems is low.
Combining Prime and Jones with its existing operationsaround Baltimore will give Comcast the biggest cable cluster in the Baltimore-Washingtonarea -- about 1.1 million subscribers, by Comcast's count. That makes the Primesystems even more valuable to Roberts.
To ensure that local regulators approve the deal, Primewill continue to manage the systems, completing rebuilds it began this year in MontgomeryCounty, Maryland, and Arlington County, Virginia.
When those rebuilds are done -- probably in June 2002 -- Comcast will have the right to seek franchise transfers and convert its investmentinto 90 percent ownership of Prime.
Until then, the arrangement is a "strategicrelationship" to jointly provide high-speed data and telephone services.
Prime Communications, a consortium led by The CarlyleGroup, a Washington, D.C., investment firm, bought the Washington-area properties from SBCCommunications for an amount close to the $650 million SBC had previously paid HauserCommunications Inc. for them in 1993. The same group also bought out SBC's stake inPrime Cable of Chicago, bringing the deal up to about $830 million.
Carlyle principal Mark Ein said at the time Prime cut thedeal with SBC in mid-1997 that Prime believed it could lead a consolidation in theWashington area.
"Over time, it has become clear Comcast is the likelycompany to do that," Ein said in an interview last week. "When you'rerolling out the new services, it's important to have a wider footprint."
Comcast also has the size, skills and resources tointroduce those services more quickly than Prime could by itself, Ein said.
"We really believed that to get these advancedservices deployed quickly, we needed a bigger strategic partner," he said.
In the current agreement, Comcast also will assumePrime's debt in Chicago and buys an option to buy Prime's Chicago holdings thatcan be exercised beginning next October. Prime is rebuilding the Chicago system, as well.
There have been reports that Prime and DistrictCablevision, the Tele-Communications Inc.-controlled unit that has the Washington, D.C.,franchise, were talking about swapping D.C. for Chicago. The new deal might make thattrade even more logical.
Carlyle owns just over half of the equity in PrimeCommunications, with the rest divided between Prime Management Group, of Austin, Texas,and Sandler Capital Corp., a New York investment firm.
According to executives familiar with the deal, Primeturned away previous offers to sell because of the firm commitments not to flip thesystems the operator made to the Virginia and Maryland regulators that approved franchisetransfers and 15-year renewals this past spring. One offer, from billionaire Paul Allen,would have allowed the equity investors to double their investment, one source said.
County authorities -- annoyed that the aging Montgomeryand Arlington systems were neglected after SBC bought them in 1993 -- wanted to ensurethe new owners would be around to follow through with about $200 million in promised plantimprovements.
Jane Lawton, the cable administrator in Montgomery County,said that the franchise transfer and renewal agreement gave the county more leeway thanusual in determining whether a future sale of the system would be "in the publicinterest."
"I think it's really a great opportunity,"Lawton said after the deal was announced. "Comcast has such a stellar reputation inthe technology area, and I feel they have the expertise to really bring the latestservices to us."
Ein said that with MSOs eagerly bidding up prices forcoveted systems, it would be hard for Carlyle to reinvest in cable soon, at least in theUnited States. Carlyle recently agreed to sell its other cable investment, the52,000-subscriber Genesis Cable, to Benchmark Communications.
Meanwhile, Comcast executives who spoke at the PaineWebberMedia Conference last week said they were itching to find systems to buy.
Adding the 1 million-subscriber Jones properties -- including ones in Maryland and Virginia that are also certified as local-exchange carriers -- will elevate Comcast to 5.5 million subscribers, or the third-largest domestic MSObehind Time Warner Inc. and Tele-Communications Inc. The Jones deal is scheduled to closein March.