After sitting out most of 2000, Charter Communications Inc. is back on the acquisition trail with a recent deal to purchase systems worth 574,000 subscribers in St. Louis, Nevada and Alabama from AT&T Broadband for $1.8 billion in cash, stock and systems.
This was the second sale in as many days for AT&T, which is expected to use the proceeds to help pay down its debt.
Through this deal and another system sale to Mediacom Communications Corp. for $2.2 billion in cash, AT&T can pare down about $3 billion of its $46 billion debt.
According to the deal, AT&T will receive $500 million in Charter common stock, systems in Miami Beach and Sebastian, Fla. with 62,000 subscribers valued at $249 million and the rest in cash.
The purchase price works out to about $3,100 per subscriber.
"[In] 2000 we took off from the acquisition front because we had 13 acquisitions to integrate and we wanted to focus on operational excellence, execution and making sure we hit all of our numbers," said Charter president Jerald Kent in a conference call with analysts. "We've done that, we've got all the management in place in each of our regions, and I think we are ready to take on additional acquisitions."
The deal boosts Charter's customer base to 6.9 million subscribers.
But the deal also brings into question AT&T's ultimate strategy for the Broadband unit, which is slated to be spun off as a tracking stock in the summer.
Some observers believe the Mediacom and Charter deals are just the beginning of future cable-asset sales by AT&T.
"If you think about it, AT&T is surgically releasing subscribers," said one observer who asked not to be named. "You've got to think that there are more to come."
When news of AT&T's plans to sell non-core assets first came out, it was expected the company would put its systems in Montana, Wyoming and Colorado on the block. Although those systems were not included in these deals, observers believe they could come up for sale soon.
AT&T Broadband spokesman Steve Lang said the company does not comment on speculation.
While future deals are up in the air, the Charter deal appears to have had one main catalyst: St. Louis.
The deal consolidates Charter's hometown market of St. Louis by adding 271,000 area subscribers to Charter's existing 240,000 customers. In Nevada, Charter picks up 156,000 subscribers in Reno and Carson City and in Alabama, the company receives another 148,000 customers in Birmingham and Montgomery.
The deal is expected to close by the third quarter.
"These are all top-notch, high-quality properties," Kent said.
While the Alabama and Nevada systems are good additions to the Charter fold-and the purchase expands existing Charter clusters in Alabama-the St. Louis system was at the heart of the transaction.
Charter has been trying to grab the St. Louis market for almost two years. It scrapped a 1999 deal with AT&T last December that would have sent 632,000 Charter subscribers in Fort Worth, Texas; Worcester, Mass; Connecticut; California; Tennessee; and Kentucky to AT&T for 704,000 customers in the St. Louis metropolitan area and additional communities in Missouri, Illinois, Alabama and Georgia with 704,000 customers.
But Charter canceled that deal when it found out that the AT&T systems were not in as good shape as originally thought. Also adding to the decision was the fact that the Fort Worth market was one of Charter's fastest-growing areas.
Kent said in the conference call that one of the objectives for consolidating the St. Louis market is to create local programming, either sports or news. The company has had discussions with several parties regarding local fare, he said.
St. Louis-already the site of a Charter Internet-protocol telephony trial and an April video-on-demand launch-could serve as a test bed for future product offerings.
"It's tough to gain control of local programming that is truly valuable without controlling the entire market," Kent said. "We have access to sports, possibly a news channel. We've had preliminary discussions with local people in St. Louis.
SG Cowen Securities Corp. analyst Gary Farber said the St. Louis acquisition was a natural fit.
"For Charter, it's like they found their long-lost brother," he said. "It gives them their home turf to use as a test bed and it creates a launching pad for one of cable's major selling points-local [content]."