Charter, Adelphia Lead Market Consolidation

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Big-market consolidation appears to be the driver behind
another series of deals last week by three top MSOs.

Charter Communications continued its months-long shopping
spree, agreeing to buy Falcon Communications Inc. for about $3.6 billion in cash, stock
and assumed debt, or about $3,600 per subscriber.

And Adelphia Communications Corp. and Comcast Corp. went
the cashless route in their consolidation efforts, swapping systems with a total of more
than 900,000 subscribers.

Although the deals are different, they have one thing in
common: Los Angeles.

There are currently about 2 million subscribers in that
market. After the swap with Comcast, Adelphia -- which had no Los Angeles presence before
this year -- will have about 1.1 million customers in the city and surrounding areas. And
Charter will bulk up to about 560,000 subscribers there.

Charter will pick up more than 1 million subscribers from
Falcon. Coupled with a separate deal last week for Fanch Communications Inc. -- with
547,000 customers in West Virginia, Pennsylvania and Michigan, for an estimated $2 billion
-- Charter will firmly position itself as the No. 4 MSO in the nation, with roughly 5.5
million subscribers, when various deals close.

Perhaps equally important, Charter -- which is owned by
billionaire Paul Allen -- will move to the No. 2 spot in Los Angeles, picking up about
100,000 Falcon subscribers in that area. And the company is expected to go after even
more.

Los Angeles has long been coveted among major MSOs as one
of the few remaining fragmented metropolitan areas. But Charter is not alone in its quest
to consolidate the area.

On the same day Charter landed Falcon, Adelphia engineered
a swap with Comcast that will give it the lion's share of Los Angeles.

Comcast had about 330,000 subscribers in Southern
California, including around 100,000 owned by its Jones Intercable Inc. subsidiary.
Coupled with systems from Century Communications Corp. -- which Adelphia dealt for in
March -- Adelphia will become the largest MSO in Los Angeles, with 1.1 million
subscribers.

The Comcast deal involved Adelphia swapping 440,000
subscribers -- mainly in Philadelphia and New Jersey -- in exchange for 460,000 customers
in Los Angeles and Florida.

As a result, Comcast will become the largest MSO in
Philadelphia -- its base of operations -- with roughly 80 percent of that market,
including upcoming management of Lenfest Communications Inc.'s systems for full owner
AT&T Corp.

The New Jersey systems also bolster Comcast's
mid-Atlantic supercluster of 4 million subscribers.

Adelphia and Charter now look to be the leading candidates
to accelerate the consolidation moves that have finally reached the historically
fragmented Los Angeles market.

Other players there include MediaOne Group Inc., which has
500,000 subscribers in the area; Cox Communications Inc., with 255,000 customers in nearby
Orange County; and Time Warner Cable, which has about 341,000 subscribers in the Los
Angeles area.

SG Cowen Securities Corp. cable analyst Gary Farber said
operators smaller than Charter were unlikely to overtake Allen's MSO. Instead, it
seems likely that smaller operators in the Los Angeles market would look to swap those
systems for ones in other markets -- a la Comcast.

"This could be the catalyst to make the [Los Angeles]
market liquid for swaps," Farber added.

There is still the specter of AT&T Corp.'s
AT&T Broadband & Internet Services (formerly Tele-Communications Inc.), which will
be about as large as Charter in Los Angeles, and which could make its own play to
consolidate the market after its pending merger with MediaOne closes next year.

Farber speculated that AT&T Broadband might stand pat
-- not selling out, but not buying more. That would leave Charter and Adelphia as
the likely combatants for Los Angeles.

Adelphia executive vice president Michael Rigas said that
although he believes the Comcast swaps will make Adelphia the largest operator in Los
Angeles, his company hasn't been thinking of further consolidating the area.

"At this point, there is nothing under
consideration," he said. "I can't say we've given it a lot of
thought."

But the idea of consolidating has at least crossed Falcon
chairman Marc Nathanson's mind.

"I think Charter would like to expand in Los Angeles,
and I would like to help them," Nathanson said. "But that's not the only
market. Paul Allen has a vision that midsized towns will be the best for Internet service.
I share that vision."

Falcon has systems in 27 states, including Oregon and
Washington, as well as the Midwest and Southeast. Nathanson said Falcon had targeted
smaller markets -- its systems average about 5,800 subscribers per headend -- which are a
big part of Allen's "Wired World" vision of the Internet future.

But the Falcon systems need costly upgrades, which would
run around $600 million. Nathanson said the company had planned to spend about $190
million this year to upgrade some of its systems to 750-megahertz, two-way capability.

He added that about 25 percent of Falcon's cable
properties are at 750 MHz, with the average channel capacity at about 45 channels. Around
one-dozen of those systems have channel capacities of between 25 and 35 each.

Nathanson said the upgrades have been moving forward, and
they will be accelerated as a result of the Charter acquisition. "[Paul] Allen wants
to do it faster," he added, "as fast as possible. Money is no object, and
leverage is not a problem."

Falcon brings something that Charter lacked: a telephony
agreement with AT&T. The MSO -- which is 46 percent-owned by AT&T -- agreed to the
telephony deal last year. "The AT&T telephony agreement will be transferred
over" as part of the sale, Nathanson said. "There may be some further
negotiation that has to be done by [Charter president] Jerry Kent."

Nathanson said Falcon hadn't expected to be able to
provide telephony over its systems until next year. The ownership change could delay the
launch even more, he added.

Falcon had been readying an initial public offering when
Charter CEO Jerald Kent stepped in, Nathanson said.

Falcon had already picked underwriters, and it was
preparing to file May 17 for the IPO, which it hoped would raise about $300 million, when
Kent called.

"He said, 'I hear you're going public. What
would it take to buy the whole company?'" Nathanson said. "They made an
offer at 16 times [cash flow]."

At that point, Nathanson took the offer to AT&T, which
consented.

Nathanson will become nonexecutive vice chairman of
Charter, and he will play a role in the company, although not a day-to-day one.

He added that he would split his time between Charter and
his newly appointed position as chairman of the U.S. International Broadcasting Agency, a
federal agency responsible for all U.S. nonmilitary broadcasting including Voice of
America, Radio Free Europe/Radio Liberty, Radio/TV Marti and Radio Free Asia.

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