'Definitive’ Adelphia Sale Bolsters 2 Top Cable Ops

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After a grueling 12-month auction process — and fending off a last-minute bid by Cablevision Systems Corp. — Time Warner Inc. and Comcast Corp. emerged as the “definitive” winner of Adelphia Communications Corp.’s 5.2 million subscribers last Thursday, with an accepted offer worth about $17.6 billion in cash and stock.

The deal has already been approved by the boards of directors of Adelphia, Time Warner and Comcast. It still needs approval from U.S. Bankruptcy Court Judge Robert Gerber and a thumbs-up from regulators. Closing is expected to take between nine and 12 months.

The complicated deal — involving several system swaps between the three parties — further strengthens the No. 1 and No. 2 cable operators, significantly boosting clusters in key markets.

Time Warner Cable will become a separate, publicly traded company after the deal closes, with Time Warner Media & Communications group chairman Don Logan as its nonexecutive chairman and current Time Warner Cable chairman and CEO Glenn Britt as its CEO.

Time Warner will snag about 3.5 million additional subscribers, boosting its footprint to 14.4 million customers and making it the dominant operator in top media markets New York and Los Angeles.

Comcast was able to unload its 21% interest in Time Warner Cable in a tax-efficient way and bolstered its standing in key Eastern markets, including Florida, Washington, D.C., and New England.

Adelphia is to receive $12.7 billion in cash and 16% equity in a combined publicly traded Time Warner Cable.

Time Warner will get Adelphia systems in Buffalo, N.Y. (growing its New York state cluster to 3.1 million subscribers); Cleveland; Los Angeles; the Carolinas and Maine.

Time Warner also gets Comcast’s 500,000 subscribers in Los Angeles, making it the dominant provider there, with 1.9 million customers, or 70% of the market, and 600,000 subscribers from Comcast in Dallas.

“This is a unique and smart way to grow our company,” Time Warner chairman and CEO Richard Parsons said in a conference call with analysts.

WHO GETS WHAT

Comcast, which contributes about $2 billion in cash and its 21% interest in Time Warner Cable, will get Adelphia customers in Florida (West Palm Beach and Miami); Washington, D.C.; Boston; Pittsburgh. Pa.; Hartford, Conn.; Colorado Springs and Vermont.

It also will receive customers from Time Warner Cable in Minneapolis; Memphis; Jackson, Miss.; Louisiana and Cape Coral and St. Augustine, Fla.

Comcast will add about 1.8 million subscribers, swelling to 23.3 million customers.

Comcast’s existing clusters get stronger. In the swap with Time Warner, Comcast receives subscribers in the Washington, D.C., suburb of Loudoun County, Va., one of the fastest-growing counties in the country.

Comcast will end up with 2.2 million subscribers in Florida (up from 1.6 million). About 56% of its total subscribers, or about 13 million, will be located in the Boston-Washington, D.C., corridor and a Detroit-Chicago-Minneapolis mega-cluster.

“We think we’re getting great systems and they’re beautifully clustered for us,” Comcast president and chief operating officer Steve Burke said on a conference call with analysts. “The mix of the 1.8 [million subscribers] we’re getting are as good as or better than the 21 million subscribers we have today.”

Said chairman and CEO Brian Roberts on the same call: “This is a creative, complicated structure that from Comcast’s perspective unlocks value, does so in the most efficient manner that we could come up with, and gives us tremendous cash-flow producing assets.

“It takes away any uncertainties surrounding a new IPO or some registration rights we had on the Time Warner [Cable] position and puts the money to work right away in our core business.”

With the yearlong auction process over, Time Warner and Comcast now look to integrate the new systems.

Time Warner expects to glean about $200 million in cost savings, mostly through lower programming and overhead costs and the ability to roll out more advanced services.

It expects to spend about $650 million over the next three years on system upgrades. Time Warner said about 85% of Adelphia is upgraded to 750 MHz capacity or better.

Comcast estimated that the combined Adelphia and Time Warner systems it will control will generate between $750 million and $1 billion in free cash flow over the first three years after closing the deal.

For Time Warner, the deal is equally attractive, creating a combined company with between $13.3 billion to $13.8 billion and adjusted operating income before interest, depreciation and amortization (AOIBDA) of $4.7 billion to $5 billion in the first year after closing.

Time Warner values its end of the deal at $2,700 to $2,800 per subscriber, after tax considerations — well below the $3,500 to $3,800 per subscriber valuations of recent deals.

Comcast, which valued its end at $3,780 per customer, said net of taxes, the value of the deal drops to about $2,903 per subscriber.

“Overall, the deal appears to be the proverbial win-win, with the primary loser the U.S. Treasury,” Banc of America Securities cable and satellite analyst Doug Shapiro wrote in a research note.

Since taking Adelphia’s helm in March 2003, chairman and CEO Bill Schleyer and chief operating officer Ron Cooper have made several strides in building up the systems.

Adelphia — which Schleyer called “a mess” when he and Cooper arrived — has increased its percentage of upgraded plant from about 50% to 95% (85% at 750-MHz or better); raised cash flow margins (cash flow as a percentage of revenue) from the mid 20% range to more than 30%; and had the strongest cash-flow growth (17.8%) in the industry in 2004.

SCHLEYER’S SHORE-UP JOB

On the downside, Adelphia has been losing subscribers, shedding about 260,000 basic customers in 2004, or 4.9% of its base. That seemed to ease up in February, when the loss was about 1,500 basic subscribers, down from 25,000 in prior months.

“We’ve tried shore up the deficiencies of Adelphia by getting the rebuild done, by getting new services introduced everywhere, including DVRs and video on demand and high-def,” Schleyer said. “We’ve really focused on improving the level of service to the customers and really ramped up our marketing initiatives over the last two months particularly, [which] has had a dramatic impact on subscriber retention.”

The vast majority of Adelphia’s 14,000 employees are expected to land at either Time Warner Cable or Comcast.

On the executive side, Schleyer said he’s determined to keep his team motivated throughout the transition.

“We have a pretty close-knit team, a lot of people have worked together for years at other companies,” he said. “Out of personal pride, I think you want to work and continue to meet the goals and objectives we set to improve this company and we’ll get focused on it.

“Nine to 12 months is a long time. I think people can keep their heads down for a while. As you get closer and closer to close, I think focus starts to wander a little bit, but we’re going to really do our best to keep the team motivated.”

One motivator: a key-employee retention plan was approved by the bankruptcy court last week. Staffers at the executive vice president level and above could reap bonuses of up to 200% of their base salaries if they meet certain performance goals.

FAT LADY SINGS?

The long-standing front-runner status Time Warner and Comcast enjoyed in the Adelphia auction was threatened earlier this month, when Cablevision lobbed in a $16.5 billion all-cash bid, increased last week to $17.1 billion.

Cablevision could still sweeten its bid, but there’s a $440 million breakup fee attached to the Time Warner-Comcast deal. Parsons said the likelihood of Cablevision trumping the deal is minimal.

“The fat lady has sung,” he told reporters on a call Thursday.

Schleyer said Adelphia tried to accommodate Cablevision’s last-minute effort, but the hurdles proved too high.

“They were very, very late to the process. We had a bid deadline of Jan. 31, they jumped in in late March. We tried to facilitate their participation, and they just clearly were pushing a rock uphill and couldn’t push it far enough to keep us from doing the Time Warner deal.”

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