Comcast Corp. pulled the trigger early on a series of deals
last week that will double its subscriber base to 8.2 million and firmly establish the
Philadelphia-based MSO in the "big three."
The deals were not surprising -- they had been expected for
months -- but they gave Comcast a chance to declare that it is heading into the age of
advanced services with both barrels blazing.
In a matter of days, the company hammered out three deals
that will add 4.6 million subscribers, create the largest supercluster of systems in the
country and lock up the long-coveted Philadelphia market.
The jewel is the $6.7 billion acquisition of Lenfest
Communications Inc., with 1.25 million subscribers in Pennsylvania, New Jersey and
Maryland, 1.1 million of which are in the city of Philadelphia. That deal is expected to
close in the first quarter of 2000, some three years faster than it might have taken under
Comcast also engineered a system swap with Time Warner
Cable to get systems in Indiana with 130,000 subscribers in exchange for its systems in
Florida with 150,000 customers.
In addition, the MSO accelerated its purchase of Prime
Communications LLC properties in Montgomery County and Arlington, Va., adding 290,000
subscribers. That deal, which was supposed to close in 2002,will now close in the second
quarter of next year.
Comcast also received about 140,000 subscribers in Chicago
from Prime that it will swap with AT&T Corp. as part of its May settlement to drop out
of the running for MediaOne Group Inc.
By owning the systems -- especially the Lenfest ones --
outright, Comcast can deploy advanced services at its own pace. According to the company,
that pace will speed up considerably.
With about 85 percent of its subscriber base now in six
clusters, Comcast expects to drastically increase its new service offerings, particularly
in digital video, high-speed data and telephony.
"We now expect to have over 600,000 new
revenue-generating units by year-end," Comcast president Brian Roberts said in a
prepared statement, "and we are just getting started."
Comcast predicted 500,000 digital subscribers by year-end,
doubling to 1 million by the end of 2000. The company said it would have 145,000
high-speed-data customers by year-end, also doubling in 2000.
SG Cowen Securities Corp. analyst Gary Farber agreed that
the deals allow Comcast to deploy advanced services quicker throughout its largest
"There is no point in sitting on your hands for any of
these businesses," Farber said. "With these things, you're better off
owning the full footprint, upgrading and rolling out new services. With these new
services, a lot of the upside is in being the first mover."
The Lenfest deal expands Comcast's already huge
mid-Atlantic supercluster to 4.3 million subscribers, stretching from Pennsylvania through
New Jersey and down to Washington, D.C. -- the largest such grouping in the industry, at
least according to Comcast.
In the end, Lenfest CEO H.F. "Gerry" Lenfest
agreed to sell the company he'd built over 25 years directly to his local rivals,
Comcast's Ralph and Brian Roberts.
Apparently, he figured that the return was a lot better
than what he would have obtained in 1997, had he gone along with efforts by
Tele-Communications Inc. chieftains John Malone and Leo J. Hindery Jr. and the Robertses
to push him into selling into a Comcast-controlled joint venture.
That boardroom arm-twisting became public when Lenfest
Communications disclosed that Malone and Hindery had resigned from the board after Gerry
Lenfest refused to sell out.
Lenfest later told the PhiladelphiaInquirer that
he had complained to Ralph Roberts that he wasn't being treated fairly. Roberts,
according to Lenfest, replied, "You don't see, Gerry -- it's my destinyto
own you." In the same story, Roberts denied making the statement.
This past May, Lenfest agreed to sell out to AT&T for
what was then termed $2.2 billion in stock. At the time, it was widely understood that
Comcast would end up with the systems.
AT&T acted as a go-between on the new deal between
Comcast and Lenfest, sources said last week.
In last week's deal press release, Lenfest said,
"It makes sense to Comcast and to our own employees and their futures to join our
companies into Comcast, which has the largest cluster of broadband cable-television
systems in the mid-Atlantic region."
He added, "I have always respected and admired the
steady growth and diversification of Comcast under the able and insightful leadership of
Ralph and Brian Roberts and their management team."
Lenfest has tracked the relative performance of AT&T
and Comcast stocks since the May agreement with AT&T. The two stocks were both at $47
and change last Thursday. But that represented a 26 percent increase for Comcast, from
about $37, and a 28 percent decline for AT&T, from about $60.44
The deal lets AT&T shave 1.25 million subscribers from
its customer base, which should help to get its $58 billion MediaOne acquisition approved.
Comcast once again moved decisively to lock in properties
that it had agreed, through clever dealmaking, to buy over time. A similar move occurred
with Jones Intercable Inc., which Comcast acquired earlier this year after buying an
option to acquire control later.
In this case, Comcast doesn't have to wait long for
Lenfest. The original AT&T-Lenfest deal called for AT&T to issue stock to Lenfest,
then trade that interest for Comcast stock three or four years later.
Comcast essentially got Lenfest as part of a settlement
that let AT&T buy MediaOne after Comcast had already cut a deal with MediaOne.
AT&T agreed to sell systems with 1.25 million subscribers to Comcast at $4,591 per
subscriber. Comcast got "most-favored-nation" status in a future telephony deal
with AT&T, and it agreed to swap systems that would net Comcast another 750,000
The Prime systems also bolstered the grouping. In another
of the Robertses' complex recent deals, Comcast had agreed to buy the Prime
properties in December, investing $735 million in Prime and agreeing to buy systems in
Virginia and Chicago later on.
All told, the Prime deal will cost about $1.5 billion,
including the assumption of $600 million in debt.
The deal had been contingent on Prime completing its
planned upgrade of its Virginia systems to meet franchise requirements that would have
blocked a change of ownership. Comcast was able to negotiate with the various
municipalities and close the deal sooner.
"The rebuild will happen, and it will happen
quickly," Comcast senior vice president and treasurer John Alchin said, adding that
the deal should be closed in the second quarter of 2000.