Analysts Split on Further Consolidation

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One of the biggest questions arising from the pending merger of AT&T Broadband and Comcast Corp. is: What will happen to the rest of the industry?

And while several analysts have speculated that the deal will spur a wave of consolidation, others in the industry are not so certain.

After the dust is settled, AT&T Comcast Corp. will have 22 million subscribers — dwarfing the No. 2 MSO, 12.7 million-customer AOL Time Warner Inc. — and creating a huge gap between itself and the other top cable operators in the industry.

As it stands, Charter Communications Inc. is the No. 3 MSO with about 7 million subscribers, followed by Cox Communications Inc. (6.2 million) and Adelphia Communications Corp. (5.7 million).

In a research report, Banc of America Securities Corp. cable analyst Doug Shapiro said that further consolidation is "inevitable."

In his note, Shapiro wrote that the formation of AOL Time Warner coupled with the pending merger between direct-broadcast satellite giants EchoStar Communications Corp. and DirecTV Inc. owner Hughes Electronics Corp. — which, combined, would have some 16 million subscribers — increases the "pressure on other distributors to add heft."

Shapiro believes the most likely candidates for consolidation are Adelphia Communications Corp. and Cablevision Systems Corp., which has about 3 million customers in the New York metropolitan area.

"Since neither has the financial wherewithal to keep pace as the necessary scale in the industry increases (nor do they have the management depth), we think it is all but inevitable both eventually sell out," Shapiro wrote. "Whether these deals happen soon is, and, of course, has been for years, the $64,000 question."

Consolidation talk has long been rampant, especially after big deals. But for the most part, it has not materialized.

Cox, long thought to be a takeover target, showed itself as a buyer despite its unsuccessful bid for AT&T Broadband. And in a press release last week, the company said that while it was disappointed in the bid's failure, it planned to continue business as usual.

"Cox will remain the premier provider of voice, video and data services in our communities," said Cox president and CEO Jim Robbins in a statement. "Our strategy is well-suited for long-term growth at our current size."

One cable investment banker said that the problem with further consolidation in the industry is that most of the remaining MSOs are largely family-owned.

"These are all controlling families that don't like to give up control — Cox, Adelphia, Charter; I consider Paul Allen to be a family owner — Chuck Dolan at Cablevision, all of them are happy the way they are," the investment banker said. "Will there be conversations? Absolutely. But do they need to sell? I don't think so."

That said, the investment banker added that practically any operator is for sale at the right price.

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