Newhouse's TWE Deal: Just An Initial Advance

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After several months of negotiations, Time Warner Entertainment L.P. and Advance/Newhouse Communications have restructured their cable partnership through a deal that will create a new MSO, with 2.1 million subscribers in some very attractive markets.

The pact will give Advance/Newhouse management control of Time Warner Cable's second- and third-largest clusters — Central Florida and Tampa Bay, Fla. — as well as systems in Detroit; Birmingham, Ala.; Indianapolis; and Bakersfield, Calif. Several other smaller systems in Alabama and Northern Florida will also be included.

A/N is owned by the Newhouse family, which controls the privately held publishing giant Advance Publications Inc.

Central Florida, which includes Time Warner Cable's flagship Orlando system, has about 701,000 subscribers, while Tampa Bay has 945,000 customers.

In addition, A/N will give up its indirect 15 percent ownership interest in Time Warner's RoadRunner high-speed data service. When the transaction is completed — likely sometime later this year — Time Warner Cable will fully manage 10.8 million cable customers. The company previously had management control of 12.9 million subscribers.

According to AOL Time Warner, the new structure would have reduced its first-quarter 2002 revenue and cash flow by $350 million and $160 million, respectively. For full-year 2001, the impact of the A/N-managed systems would have lowered revenue and cash flow by $1.25 billion and $570 million, respectively.

The transaction would have reduced AOL Time Warner's net debt as of March 31, 2002, by some $800 million.

TWE-A/N was formed in 1995, with Advance/Newhouse contributing 1.4 million subscribers in upstate New York. The partnership — which originally had 4.5 million subscribers — ballooned to 6.7 million this year, including Time Warner Cable systems in Florida, New York and the Carolinas.

A/N has had the right to renegotiate the partnership every April 1 since 1998, the three-year anniversary of the deal. But until last March, A/N has only made minor adjustments, such as requiring Time Warner Cable to tell Newhouse about its carriage agreements with data provider America Online.

CORPORATE DIFFERENCES

That changed in March, when according to published reports, A/N became concerned with how the partnership was being run.

A/N president Robert Miron said that there were no hard feelings between the two companies.

"We're operators and we operate all of the businesses we own," Miron said. "We basically decided we wanted to operate these."

Although both parties denied that the restructuring was a result of any animosity, Time Warner Cable chairman Glenn Britt said that the differences between the companies could have created some conflict.

"The Newhouse family desired to have more hands-on management of this business," Britt said. "They've been in the business for many years. They run their businesses privately and they have businesses they operate. In a way, the initial partnership was unusual for them."

Britt also denied that there was friction between the two companies.

"There's no animosity; we have a great relationship," Britt said. "As Time Warner got bigger, first with the Turner [Broadcasting System Inc.] merger and later with [America Online Inc.], being a partner with somebody that's just in the cable business, there became the risk of conflicts of interest.

"I think they got concerned about that. That's certainly part of the reason why they wanted to take a more active role."

And the TWE-A/N partnership will remain intact — at least technically — giving both companies the benefits associated with a large subscriber base.

"I think we can do a lot of things together that jointly help each other," Miron said. "We get a lot of good engineering help, gain the scale for programming buying and other buying and things of that nature. It's a good idea for both of us."

BUILDING A TEAM

Miron's next task: To assemble a management team. Currently, A/N's officers consist of him and his son Steve Miron, the company's executive vice president.

But the duo has extensive cable experience: Bob Miron has been in the cable industry for about 30 years and has served as chairman of the National Cable Television Association twice. Steve Miron had served as vice president and general manager of Time Warner Cable's Syracuse, N.Y. system until joining his father earlier this year.

Because of Miron's industry experience, most observers believe he'll be able to put together a strong management team. And one analyst said the talent pool is quite large.

"You've had a lot of consolidation over the last five years and I think that results in a lot of available management strength," said Stifel, Nicolaus & Co. Inc. senior vice president of equity research Ted Henderson.

Analysts looked at the deal as good for both companies. Although AOL Time Warner does lose two of its larger systems, they were never consolidated into its balance sheet anyway.

"It cleans up the income statement," said Sanford Bernstein & Co. media analyst Tom Wolzien. "That's the good stuff."

But Wolzien said the restructuring also points to AOL's difficulty in playing well with others.

"These guys couldn't manage a partnership, so the other partner got a separate bedroom," Wolzien said.

EYEING EXPANSION

Despite the new sleeping arrangements, the deal automatically makes Advance/Newhouse the No. 7 MSO in the country, ahead of Mediacom Communications Corp. and Insight Communications Co. And most analysts expect A/N to try to get bigger.

"I think Bob Miron is going to be the comeback king," said one source in the financial community. "With $800 million in debt and $500 million in cash flow, they'll come back big and strong."

Newhouse had a strong operating history. It was one of cable's largest operators in the pre-consolidation era, running systems under the names NewChannels, Vision Cable and Metrovision.

Miron said that he would look to expand, but declined to say where.

"We'll look," Miron said. "We'll certainly be thinking about things."

With the Time Warner Cable systems comes about $570 million in cash flow, which could be leveraged to buy additional systems. According to some people in the financial community, those systems alone would translate into $5 billion to $6 billion in buying power.

Henderson said that he expects A/N to become a force in the industry.

"They are another player and I like that," Henderson said. "I like the idea of those subscribers landing in the hands of someone who seems to be embracing the opportunity of operating cable systems."

Also in A/N's favor is the fact that it is privately held, which means it won't be beholden to the whims of public shareholders, many of whom have been loathe to see their holdings take on additional debt. While A/N has been very conservative in its willingness to take on debt, the company could do so if it sees the opportunity arise.

"I'm sure that they will be cautious of leveraging up their cash flow," Henderson said. "But they're not public, and not subject to the whims of the public marketplace, and that's huge to them. So it means they have real borrowing power."

At current system valuations of around $3,000 per subscriber, $5 billion to $6 billion could buy A/N 1.7 million to 2 million subscribers, just by leveraging the former Time Warner Cable systems.

"My sense is if they took those subscribers, their expectations are to get a little bigger," Henderson said. "They're taking those subs at a time when there are some systems hitting the market from Adelphia [Communications Corp.]. I think they see it as a buyer's market right now."

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