The Los Angeles cable market might finally have a dominant player — and it could be Time Warner Cable, vaulting over three other L.A. incumbents.
That and other cable scenarios could play out in coming weeks, as the auction for Adelphia Communications Corp. begins to wind down.
Final bidding for Adelphia's properties — 5.2 million subscribers, including 1.2 million in Los Angeles — closed on Jan. 31, with Time Warner Inc. and Comcast Corp. submitting a joint bid for the entire MSO said to be in the neighborhood of $17 billion.
A competing bid for all of Adelphia was made by private-equity giants Providence Equity Group and Kohlberg Kravis Roberts & Co., said to be between $15 billion and $16 billion. According to sources familiar with the process, JP Morgan & Co. is advising Providence Equity and KKR in its bid and would provide financing.
About five other smaller players made bids for individual Adelphia clusters.
Los Angeles has long been a target for consolidation. Currently, five separate MSOs, including Adelphia, serve the area.
Sources familiar with the situation said Comcast appears willing to give up its interest in the Los Angeles properties — it owns a 25% interest in Adelphia's systems there — as well as its 500,000 wholly owned customers in the area to Time Warner for other Adelphia or Time Warner Cable properties.
Time Warner currently has about 355,000 subscribers in the Los Angeles market. Adding Adelphia's 1.2 million customers there and Comcast's 500,000 would give the media giant about 2.1 million Los Angeles customers.
That would dwarf other players in the market: Charter Communications Inc. has 507,000 and Cox Communications Inc. has 274,000 subscribers in nearby Orange County.
Time Warner Inc. chairman and CEO Richard Parsons acknowledged his company and Comcast made a joint bid for Adelphia, but said little else.
“I can confirm we are in the hunt [for Adelphia]. We're working with Comcast and we're very excited about the possibility of that transaction,” Parsons said on a conference call with analysts to discuss its fourth-quarter results last Friday. “But it's still early days. Stay tuned.”
BIDS OPEN: SOURCE
One source close to the process said the Denver-based MSO asked participants to keep their bids open for another 30 days. That likely means that bids submitted last Monday were effectively a starting point for further negotiations, the source said.
Most observers continue to believe the Adelphia auction is Time Warner's and Comcast's to lose.
Last April, Adelphia split itself into seven separate pieces to facilitate an auction and attract the largest number of bidders. Those clusters are: Los Angeles and West (1.5 million subscribers); Florida and Southeast (891,700); Buffalo and Connecticut (408,800); New England and Eastern New York (554,900); Cleveland and Ohio (638,200); Pennsylvania (518,000); and Virginia/Maryland/Colorado Springs/Kentucky (869,700).
Clusters generally run along existing subscriber lines for both MSOs. Time Warner has significant clusters in upstate New York (coinciding with the Buffalo property) and Ohio (coinciding with Cleveland); while Comcast has systems in the Florida, New England, Pennsylvania and Virginia clusters.
Citigroup Smith Barney cable analyst Niraj Gupta said Comcast is expected to contribute between $1 billion and $2 billion to the Time Warner bid.
Sources familiar with the auction process confirmed that figure.
In a report, Gupta wrote that cash contribution and its 21% stake in Time Warner Cable could translate into 2 million to 2.5 million subscribers.
It's expected Comcast will accept some Adelphia subscribers in return for its 21% Time Warner Cable stake.
“We expect Comcast to emerge with a mix of Adelphia and Time Warner Cable properties that will enhance the company's cable clusters,” Gupta wrote.
Just how Time Warner and Comcast would split up Adelphia if it were to be the winning bidder is not publicly known.
But sources familiar with the auction process said that Time Warner is taking the lead in the joint bid.
“Time Warner is very much in the driver's seat in this,” said one source familiar with both companies' thinking.
Ultimately, the decision on what happens to Adelphia lies with its bondholders, bankers, advisers and the bankruptcy court.
While Adelphia combs through bids, it also is pursuing an emergence from bankruptcy on a parallel track and selling separate clusters to multiple bidders.
SMALLER PLAYERS BID
No matter the outcome, Adelphia is expected to file an amended plan of reorganization with the bankruptcy court in the near future. That's mainly a precaution, in case the company decides not to sell.
One source familiar with the bidding process said several smaller cable companies have lobbed in bids for pieces of Adelphia, including Patriot Media & Communications (backed by Spectrum Equity Investors, Bain Capital and Silver Lake Partners); Atlantic Broadband (backed by Abry Partners); former Charter Communications Inc. CEO Jerry Kent's Cequel III (backed by Goldman Sachs Capital Partners); Bresnan Communications Inc. (backed by Providence Equity); and Advance/Newhouse Communications' Bright House Networks.
The size of those bids could not be determined.
Officials at Atlantic Broadband, Cequel III, Patriot Media, Bresnan and Advance/Newhouse declined comment.
Sources familiar with the bidding process said Cequel bid on three of Adelphia's seven clusters, including the Florida properties. Atlantic Broadband is concentrating on Pennsylvania and Newhouse is bidding on Florida, those same sources said.
Another possible bidder could be one of Adelphia's largest bondholders, W.R. Huff Asset Management.