No Wireless Deals in Sight

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It’s been about eight months since Comcast Corp. and a consortium of cable operators first started mulling the idea of breaking into the wireless market, either by buying a carrier outright or forming some type of joint venture.

But as two big wireless companies have made plans to combine (Sprint Corp. and Nextel Communications Inc. are scheduled to close their $38 billion merger by the end of the year) and another (T-Mobile USA) is reportedly up for sale, no deal has yet been reached.

Not that they haven’t been trying. Back in October, Comcast, Time Warner Cable, Cox Communications Inc. and Charter Communications Inc. joined together to look into the wireless conundrum.

ROBERTS: NOT BUYING

But in an interview with the Financial Times last week, Comcast chairman and CEO Brian Roberts and president and chief operating officer Steve Burke effectively put the kibosh on buying a wireless carrier.

Roberts flat out told the Financial Times that Comcast would not buy a wireless carrier.

“We don’t want to own wireless per se, but to make our products available through wireless devices,” Roberts told the newspaper.

Burke was a little more nuanced — he didn’t rule anything out completely, but basically said the No. 1 MSO would most likely opt to cut a joint-venture deal with a wireless carrier to provide some type of wireless service.

Burke told the newspaper Comcast has three options: buying a wireless company, forming a joint venture or building out its own wireless network.

“I don’t think we will buy a cellular company. Relative valuations are too high, and I am skeptical that it could make financial sense.” Burke added that building its own network would be too expensive.

“All the signs are that we are gravitating to the middle option,” he said.

That would suit Wall Street just fine. Analysts have said practically from the start that buying a carrier would drag down the cable sector with huge debt — at a time when cable capital expenditures are finally declining — and could effectively wipe out free cash flow.

While the consortium could spread out the pain of an acquisition and increased debt among its members, analysts still believe it would be too high a price to pay.

T-Mobile is expected to fetch a price of $25 billion to $30 billion. Plus, the buyer would have to shell out another $5 billion to $10 billion to build out the network.

Such an upgrade cost caused parent Deutsche Telekom AG to investigate a sale, according to several published reports.

T-Mobile has about 18.3 million subscribers, mostly cost-conscious users attracted to its lower rates (about $10 to $15 less per month than its three largest competitors). But that too could be discouraging to potential buyers because churn for price sensitive customers is usually high.

T-Mobile also is a distant third in the U.S. wireless market — it has about half the subscribers of Verizon Wireless and one-third of the customers of industry leader Cingular Wireless. That lack of scale is particularly daunting in the wireless market because it puts them at a significant cost disadvantage to the rest of the industry, Sanford Bernstein & Co. cable and satellite analysts Craig Moffett wrote in a research report.

Moffett added that T-Mobile’s weakness in data services — which some MSOs see as an opportunity to extend in-home cable broadband — and its massive capital requirements make the wireless carrier a “relatively unappealing partner for a cable MSO.”

Adding to the complexity is that two of the consortium members, Comcast and Time Warner Inc., are in the middle of closing their $17.6 billion acquisition of Adelphia Communications Corp.

While sources familiar with both companies have said the Adelphia deal will not rule out other mergers or acquisitions for either company as it nears the closing date — expected by the first quarter of 2006 — closing Adelphia is taking up most of Comcast’s and Adelphia’s time.

K.C. TRIAL STILL A TEST

Time Warner Cable, which also plans to spin off from parent Time Warner Inc. as a separate publicly traded company after the Adelphia closing, has been testing a wireless phone service with Sprint in its Kansas City system since the beginning of the year, but there is no indication yet that the service will be rolled out to other markets.

Time Warner Cable spokesman Mark Harrad said the consortium continues its work, but individual members are free to pursue their own initiatives.

The consortium was set up, he said, to allow member operators to look at wireless options that extend beyond their operating territories. That is still the case.

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