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21% solution

10/03/2004 8:00 PM Eastern

Time Warner Inc. and Comcast Corp. say they might make a joint bid for Adelphia Communications Corp., but some analysts figure that Comcast will reap the benefits of Time Warner buying Adelphia with minimal financial risk to itself.

In other words, it would be a typically advantageous deal for Comcast.

The key is Comcast’s 21% stake in Time Warner Cable, which it must divest by 2007 as a requirement of its 2002 purchase of AT&T Broadband.

Comcast got the 21% stake — plus $2.1 billion in cash and $1.5 billion in Time Warner Inc. stock — in a deal to dissolve the Time Warner Entertainment partnership in 2002, after Comcast got the 27% TWE stake from AT&T Corp.

Buying Adelphia would bulk up Time Warner — another 5.2 million subscribers would give Time Warner Cable 16.1 million — and provide properties to swap with Comcast for the 21%.

FIRST-STEP DEAL

The first step in the process occurred last Monday, when Comcast agreed to a deal that would trim the Time Warner Cable stake to 17% in exchange for $750 million in cash and 90,000 cable subscribers (about $1 billion in total value).

“For our part, if Comcast chooses to exercise its option, we’ll have the opportunity to increase ownership of our cable company based on a mutually attractive valuation,” Time Warner chairman and CEO Richard Parsons said in a statement. “In addition, the trust that holds Comcast’s interest in Time Warner Cable has agreed not to ask us to begin the process to register its Time Warner Cable ownership for at least the next six months, providing the two of us time to explore alternative approaches to facilitating Comcast’s exit from its ownership position in Time Warner Cable.”

The 21% stake has been valued at $5.4 billion to $6 billion. Given the $3,300 per-subscriber valuation placed on the 90,000 subscribers in last Monday’s deal, the 21% Time Warner Cable stake could translate into 1.6 million to 1.8 million subscribers — likely to come from systems acquired from Adelphia.

Comcast has been open about hoping to grow beyond its 21.5 million subscribers via the Adelphia auction, either by buying them directly or getting them from Time Warner afterward.

In July, at a daylong briefing for reporters in Philadelphia, CEO Brian Roberts answered a question about possible interest in Adelphia in part by saying the Denver-based MSO was a unique acquisition opportunity and that Comcast would like to somehow convert its Time Warner Cable stake into more cable systems.

“We like the cable business,” Roberts said in July. “Actions speak louder than words. Hopefully, we’ll find a way to participate in some level and grow the company.”

GUPTA AGREES

“It seems to me that the pursuit of Adelphia is really all about Time Warner getting bigger so that they can unwind their Comcast partnership,” Citigroup Smith Barney cable analyst Niraj Gupta said last week.

Gupta added: “I would expect Time Warner to be far and away the big buyer in the Adelphia deal and to walk away with a much larger than 50% stake if the two were to bid together,” he said.

At the Merrill Lynch Media & Entertainment conference in Pasadena, Calif., last Tuesday, Roberts confirmed the possibility of a joint Adelphia bid but didn’t say much else on the subject.

“It’s going to be a long, open process,” Roberts said. “We’re hopeful to just have a look.”

He was more voluble about the billion-dollar deal with Time Warner.

“That transaction would begin the process to dispose of a multibillion-dollar stake, that we didn’t want to wake up at the end of five years and say 'We have to have a fire sale,’ ” Roberts said.

“We’re working well with Time Warner,” he said. “We have an orderly process, but we gave ourselves some time to see where Adelphia played itself out and we’re going to try to work together on that.”

AFTERMARKET SALES?

Time Warner could try to buy Adelphia via a reverse merger, combining its cable assets with those of Adelphia, which already has a publicly traded stock.

While the potential is high for Time Warner and Comcast to dominate the auction, at least one analyst believes smaller players will be involved either during or after the auction.

“This isn’t happening in a vacuum; it’s not a mystery that Time Warner and Comcast are talking about bidding together,” Stifel, Nicolaus & Co. cable analyst Ted Henderson said. “At the end of the day, small players are going to participate in how Adelphia’s broken up.

“Whether they participate in the initial auction or whether they participate after a major well-heeled buyer takes it all out remains to be seen. No matter what happens, the Adelphia systems are not just going to end up in Time Warner and Comcast. They are going to be parceled out. “

SEVEN CLUSTERS

Adelphia said recently it would offer systems for sale in seven separate clusters: Northern New England/Eastern New York; Cleveland/Greater Ohio Valley; Florida/Southeast; California/Western; Virginia/Maryland/Colorado Springs/Kentucky; Pennsylvania; and Western New York & Connecticut. Subscriber counts in the clusters range from 500,000 to 1.3 million.

Henderson said Time Warner and Comcast could jointly buy the Adelphia operations, then sell off smaller properties in the West (like those in Northern Idaho, Northern Montana and Southwestern Wyoming) to other players.

Those smaller players could include operations headed by longtime cable executives like Bill Bresnan’s Bresnan Communications, Steve Simmons’s Patriot Media & Communications and Jerry Kent’s Cebridge Connections.

Those operators also have long-term relationships with large private equity firms such as Providence Equity (Bresnan); Spectrum Equity Investors (Patriot); and GS Capital Partners, the private equity arm of Goldman Sachs & Co., and Oaktree Capital Management (Cebridge). Before signing the NDA, Simmons openly expressed interest in buying up to 1 million subscribers from Adelphia. Bresnan and Kent haven’t said anything publicly about any possible interest in Adelphia.

40 NDAs SIGNED

Time Warner and Comcast teaming up hasn’t diminished interest in others taking a look as well. Adelphia spokesman Paul Jacobson said more than 40 interested parties signed confidentiality agreements to participate in the auction — double the number that had signed in the prior week.

Adelphia would hope to obtain $17 billion to $20 billion in a total sale.

Analysts expect bids to come in at between $3,300 and $3,800 per subscriber, putting the price for all 5.2 million at $17.2 billion to $19.8 billion.

That would be in line with current public valuations for cable stocks, now $2,500 to $3,800 per subscriber.

NO $4,000 SUBS

Henderson — declining to estimate what price Adelphia would ultimately get for the systems — said it’s unlikely to attract valuations as high as $4,000 per subscriber, as was once speculated.

“Given the way the broad market is reflecting public-market valuations for cable stocks, how aggressive can you expect any operator to be for bidding on properties?” Henderson asked. “Public securities provide some level of a benchmark. I would expect bids to be north of the public valuations, but not so far north that it’s an absolute lay-up for the Adelphia bondholders.”

Also in question is whether or not the auction will be completed according to Adelphia’s timetable. The MSO has said it expects final bids to come in December, with the final sale slated for early 2005.

With Roberts saying the process is likely to be a long one, several observers believe that the process could drag on for as much as a year. “Brian has set the agenda,” said one member of the financial community that asked not to be named.

Also complicating the auction is the way in which Adelphia decided to split up its systems. While Adelphia has said the clusters were created with the idea of attracting the largest possible number of potential bidders, others say that the parings have turned off some possible participants. For example, one member of the financial community said that pairing the Florida systems with those in the Southeast has virtually eliminated Bright House Networks, which has a strong presence in the state, from the auction.

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