Playing It Cool

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In abandoning its quixotic attempt to buy The Walt Disney Co. last week, Comcast Corp. added another big name to the list of potential bidders for Adelphia Communications Corp.

But if the nation’s biggest cable company and cable’s most active dealmaker has designs on buying another 5.4 million customers in a single block, it’s keeping that desire to itself — at least early on.

Then again, so are the other likely suspects among possible buyers at this early stage of the dance.

Scenarios, of course, have been bandied about by Wall Street and investment-bank people who follow the sector. Comcast could bid on its own for Adelphia. It could try to partner with other MSOs and divvy up the in-turnaround No. 5 cable company.

Or it could sit this one out, contemplating deals down the road.

Withdrawing the unsolicited offer to buy Disney — citing total lack of interest on Disney management’s part — less than a week after Adelphia said it would consider an outright sale led to natural speculation that Comcast CEO Brian Roberts might set his sights on a cable company that’s definitely for sale.

But Roberts was playing it cool last week — as were the CEOs of potential bidders Time Warner Inc. and Cox Communications Inc. — and no one had yet made a formal offer.

Last Wednesday, on a call after Comcast said it was withdrawing a $48-billion bid for Disney, Roberts told reporters Comcast would look at Adelphia.

“I suspect we’ll look at those,” he said of Adelphia’s assets. “A number of their systems fit our footprint.” But he said Comcast would maintain a disciplined approach to potential acquisitions.

Cox CEO Jim Robbins did even less to encourage those who feel his company should buy Adelphia and vault to No. 2 on the U.S. MSO list.

“When we are asked if we are interested in purchasing all of Adelphia, the answer is no,” Robbins said during an earnings conference call last week.

Roberts and Robbins might only want some Adelphia systems — Adelphia’s prized asset is its Los Angeles operation — but chairman and CEO Bill Schleyer has ruled out selling only pieces of the company.

CAP CONSIDERATIONS

Also hampering an all-out Comcast bid is the danger of exceeding the federal ownership cap, currently at 30% of U.S. multichannel-video homes. Absorbing all of Adelphia would push Comcast over the threshold to 31%, Oppenheimer & Co. cable analyst Tom Eagan reckoned.

The government hasn’t enforced the cap in the past, but Eagan doesn’t see Comcast pressing the issue.

“While it’s true that the [Federal Communications Commission] has not verbalized its intention to enforce this cap, it would require Comcast utilizing important political capital should it decide to acquire a content company (what the company is more strategically looking for) down the road,” Eagan wrote in a report.

Film studio Metro-Goldwyn-Mayer Inc. is also on the block, and has been identified as a possible target for Comcast or Time Warner. At $5 billion to $6 billion, MGM would come cheaper than Adelphia.

But even though Comcast made a move on content powerhouse Disney after thinking it sensed weakness, Roberts declined to get involved in the Vivendi Universal S.A. auction last year. That bidding was ultimately won by General Electric Co.’s NBC television unit for $14 billion.

Vivendi Universal included a film studio, cable channels and a television-production arm, while MGM’s main attraction to Comcast would be its vast film library.

“If they go back and buy MGM, you have to wonder why they didn’t buy Vivendi,” Citigroup Smith Barney cable analyst Niraj Gupta said.

Roberts told reporters on a conference call that owning more content providers was “not critical to growth,” but Comcast will look at any other opportunities. He wouldn’t comment specifically on MGM.

COX’S CASE

Cox seemed like a prime candidate to bid aggressively on Adelphia, after yielding AT&T Broadband to Comcast.

But Robbins, during an earnings conference call with analysts last Thursday, said Cox would only consider buying those properties it considers well-clustered, in midsized to large markets and priced to increase shareholder value.

“When we are asked if we are interested in purchasing all of Adelphia, the answer is no,” Robbins said. “What is important for us is the right systems, not just a whole bunch of disparate customers.

“You would expect us to continue to monitor the landscape and if the right opportunity comes along and makes sense for our shareholders and fits the criteria that I’ve stated above, you could and should expect us to take a look.”

Adelphia does have some systems scattered about. But it also has large chunks of customers in Los Angeles (846,868), Florida (829,048) and Virginia (541,754), according to its 2000 10-K annual report, the last time the company publicly disclosed those numbers.

Its largest customer block is in the Pennsylvania, Ohio and New York area, with 1.1 million.

“I think Cox likes 60 to 70% of Adelphia assets a lot, but they don’t want to buy Adelphia for 60 to 70% of the assets,” Gupta said.

Some diehard backers of a Cox deal were clinging to hope.

“We believe opportunities to acquire cable assets such as Adelphia are increasingly scarce and that Cox is actively looking at Adelphia,” Fulcrum Global Partners analyst Richard Greenfield wrote in a report. “Not only does Adelphia present 5 million subs that Cox’s management could significantly improve, it would improve the clustering of certain Cox systems, as well as increase the intrinsic value of Cox to content/programming entities.”

LIBERTY ANGLE

Another possibility is a three-way deal between Cox, Liberty Media Corp. and Advance/Newhouse. Liberty could finance an Adelphia deal in return for Cox’s and Advance/Newhouse’s 25% stake in cable programmer Discovery Communications Inc.

Harrigan valued Cox’s 25% stake in Discovery at $4 billion. Gupta pegged it at about $3 billion.

Cox could get the systems it wants. Advance/Newhouse — which owns about 2 million subscribers, mostly in Florida — could get Adelphia systems in that state. Liberty could own 100% of Discovery.

The asking price could be the biggest block at the moment. So far, no one has made a formal bid.

Adelphia valued itself at about $17 billion as part of its reorganization plan on Feb. 25, a price many creditors claimed was too low. But the $18 billion to $20 billion valuation that some analysts have given company may be too high for any single buyer at the moment.

“I’m amazed at some of the valuations that are getting tossed around,” said Janco Partners cable analyst Matt Harrigan. “I think $3,500 [per subscriber] would be a bit of a reach, let alone $3,800.”

TOUTING TIME WARNER

If any MSO were to go it alone on Adelphia, Time Warner would be the most likely candidate, in the view of Harrigan and other analysts. Merrill Lynch’s Jessica Reif Cohen’s take was that Comcast could look at Adelphia, but “we continue to believe it makes more economic sense for Time Warner to acquire the Adelphia properties and rationalize its portfolio.”

Time Warner does have the complication of a Securities and Exchange Commission investigation of accounting practices at its America Online unit.

On his earnings conference call with analysts last week, Time Warner Inc. chairman Dick Parsons said he’d continue to look at acquisitions with a prudent eye.

“A lot has been written and said in the media in the last few days about what we’re doing and what we’re not doing and what we’re attempting to do,” Parsons said on a conference call discussing first-quarter results. “I would characterize most of that as rank speculation. What we have been doing is focusing on running these businesses and I think the results are becoming clearer.

“We’ve also said that we have gotten the balance sheet in the kind of shape we wanted, and going forward we’re going to be very prudent, very measured, very disciplined in terms of how we seek capital to work to improve returns for shareholders.” Gupta said one way around the SEC issue would be for Time Warner to merge its cable operations into publicly traded Adelphia. Time Warner wanted to take its cable unit public last year, but punted because of the SEC investigation.

ANOTHER COMBO

Another possibility: a combined Time Warner-Comcast buyout.

That would let Time Warner get closer to Comcast in scale and then unwind Comcast’s 21% stake in Time Warner Cable by exchanging systems for that interest. Gupta estimated that Comcast could get 2 million additional subscribers that way — reminiscent of when it stepped aside and let AT&T Corp. buy MediaOne Group Inc.’s 5 million subscribers in 2000, only to end up buying the 2 million subscribers it wanted most anyway.

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